Dealing with outstanding debt is often a distressing situation. It involves endless negotiations with your lender and impending anxiety about what will happen next. The only light at the end of this tunnel is getting the debt canceled or forgiven. In this situation, you will need to prepare yourself to file for the 1099-C Cancellation of Debt form. But what exactly is this for?
What is a 1099-C Form?
Having a taxable debt of $600 or up canceled by your lender qualifies them to file an IRS 1099-C form. This form states that the debt has been forgiven, canceled, or never paid back from bankruptcy.
Filing this form is essential for the debtor in paying taxes unless you qualify as an exempted case. Hence, it is also obligatory for the lender to send you a copy of the annual tax filing form. Unless you fall under the excluded tax filing categories, you will need to pay debt forgiveness or settlement tax for your canceled debt.
What are the Exclusions in Paying Debt Forgiveness Taxes?
The IRS has a set of reasons why people may be exempted from paying debt forgiveness taxes. When you fall under any of these categories, you won’t have to file your debt as ordinary income on your tax return.
Here are some common exclusions to paying debt forgiveness taxes:
- Canceled debts that qualify as a gift or inheritance
- Deductible canceled debts upon payment
- Qualified student loans
- Qualified property price and mortgage modification
- Debt cancellation in Title 11 bankruptcy and insolvency
When Do You Qualify for Paying Debt Forgiveness Taxes?
If your canceled debt doesn’t fall under the tax filing exemption cases, then you would have to report them as ordinary income on your tax return. Here, you will file your canceled debt on Form 1040 as “Other Income.” Thus, it will become part of your taxable income (not as a separate tax) in your overall tax return.
The tax you will need to pay in these cases will vary depending on factors such as your income, credits, deductions, and adjustments.
How to File Your 1099-C Form
Upon receiving your 1099-C form, you have to file it safely as a part of your tax filing preparation. It would help employ a qualified tax professional or CPA to ensure a seamless tax filing. Furthermore, they will help guide you in case you’re unsure whether your canceled debt is taxable or not.
If you qualify under the exclusions of debt cancelation tax filing, you have to file Form 982 together with your tax return. This form would inform the IRS about the details of your exclusion on paying debt forgiveness taxes.
Here are some guidelines on filing the 1099-C form:
- Not receiving a 1099-C form: In this case, you would still need to file your canceled debt on your tax return. While this may be a shortcoming of your lender, it’s your responsibility to report and include it on your Form 1040. If you’re not aware of the exact debt amount, you must contact your lender.
- Forgetting to file your 1099-C on your tax return: If you weren’t able to include your canceled debt on your tax filing, you need to file an amendment. You will also need to pay for an unpaid tax that you weren’t able to file.
- Canceled debt less than $600: You will need to report a canceled debt less than $600 as income on your tax return.
- Losing your 1099-C Form: You can simply contact your creditor and request another copy of your 1099-C form.
Receiving a 1099-C Form for an Old Debt
Note that 1099-C forms don’t fall under the statute of limitations. Hence, you can still receive a 1099-C form for debts you have gotten ages ago. In cases like this, it’s best to contact a tax professional or CPA to determine the necessary settlements. It’s also best to call your lender to clarify any mistakes or overlooked documents on their part.
Here are the common scenarios when you receive a 1099-C Form for an old debt:
- You’ll qualify for an exemption;
- You’ll amend an old tax return;
- You’ll include your 1099-C on your present tax return.
Incorrect 1099-C form
Lenders and creditors can input mistakes on debt-related documents. Here are the most common errors in filing a 1099-C Form that you must take note of:
- Receive a 1099-C Form for fully paid debt
- Receiving a wrong debt amount in the 1099-C form
- Wrong discharge date
If this is the case for you, the first thing you must do is reach out to your lender. Request for a copy of a corrected 1099-C Form. If they don’t comply, you can either ask a tax preparer to make adjustments or file a complaint directly at the IRS. The IRS will step in then to resolve the mistake.
If you’re filing a joint return with your spouse, you’ll have no issue filing your 1099-C form on your return. However, in the case of separate filing or cosigning with other individuals, the tax report is up to the state law. While some states assign income tax according to each of your loans, some only include the ownership percentage.
Since it can get more complicated when other factors are involved, it’s best to always reach out to a tax professional.
Tips on Resolving Canceled Debts
With all that said, many issues may arise when you’re not aware of how to resolve canceled debts. It’s also alarming that many people have no idea about the 1099-C form. Hence, as a preparation, take note of these tips on how you can resolve canceled debts correctly:
- Make sure to keep your 1099-C form upon receiving it.
- Talk to your lender or creditor about the exact amount declared on the 1099-C form. Clarify any disputes on the amount or date written on the form.
- Make sure to employ a tax professional with expertise in 1099-C in finalizing your debt settlement.
Hopefully, this guide was able to help you gain more knowledge on the 1099-C form and debt cancellation.