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Why Did I Get a 1099-C and What Do I Do With It?

As of April 2014, American households owed $11.68 trillion in debt, which is up 3.7% from last year.

With so many jobs lost and so many people having to take lower paying jobs, there is often not enough money in a household budget to pay these debts. Sure, a household can declare bankruptcy, but that might be overkill, if there are only a couple of accounts that the family is past due on.

Enter the collection agents. They call you, and call you, and call you. You make payment agreements, you pay them some money, but the fees and the interest charges keep ballooning the amount due.  Finally, someone offers you a deal: You pay us $3000 and we’ll forgive the remaining $7000.

You scrounge around and come up with the money, glad to be off the hook for the debt, glad to not be getting the day and night phone calls. Relief!

Then January comes and you get this form in the mail, this 1099-C. You have no idea what it is or why you have it or what you’re supposed to do with it.

Well, guess what. The collection agent never told you this, but the amount of debt that was forgiven, the $7000, has now been declared income to you. The thinking is that you benefitted by that amount, and you shouldn’t get that for free. So, the amount that was forgiven now has to be added to your tax return as income and you have to pay taxes on it.

Here’s the trick, when you get one of these. It is called form 982, Reduction of Tax Attributes Due To Discharge of Indebtedness. Don’t let the name of the form scare you. What you really want is the worksheet that goes with the form.

This worksheet has two sections: assets and debts. There is a date on the 1099C, which is the date the original debt was cancelled. As of the day before that date, you list the values of what you owned and the amounts you owed (including the debt that would be cancelled the next day.) You’ll have to estimate some things, like the values of your furniture and books and jewelry. Just do the best you can. Other things, like the value of your cars, you can look up online. You can also look up how much money was in your bank accounts that day and how much you owed on other credit cards or your mortgage.

When everything is laid out on the form, you subtract the total value of your assets from your total debt. If the amount that remains is debt, and it is more than $7000, then your financial situation as of the date of cancellation was that you were insolvent, even if you were not in bankruptcy. That means you don’t owe any taxes on the $7000 that was cancelled. Pretty neat, huh?

So, you enter the amount of your insolvency on the 982 and include it with your tax return. Voila! Off the hook again!!

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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

If you have any questions or comments about our software, feel free to contact us at any time.

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