Ines Zemelman, EA
16 Jan 2024
Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice.
Always consult with a tax professional for your specific circ*mstances.
When a lender cancels or forgives a debt of $600 or more, he or she must send Form 1099-C to both the IRS and the borrower.
Canceled debt refers to a debt that is forgiven or discharged by the lender. This means that the borrower is no longer responsible for repaying the debt and is released from any legal obligation to do so.
Canceled debt can occur in a variety of situations, such as when a lender forgives a portion of a loan, or when a debtor declares bankruptcy and has some of their debts discharged.
When a lender cancels your debt, you may receive an IRS Form 1099-C. This form is also known as the IRS forgiveness of debt form. Although you are no longer responsible for the debt, you should not ignore it.
You may have to pay taxes on the forgiven amount since the IRS considers it taxable income.
NB! You should correctly report any forgiven debt if you receive a 1099-C. Incorrect reporting could result in penalties and fees, so you need to understand this form.
What is Form 1099-C?
The IRS requires lenders and creditors to report payments and transactions made to taxpayers on Form 1099-C. When $600 or more of debt is canceled or forgiven, these entities must file Form 1099-C.
It is the taxpayer's responsibility to report the amount on their tax return as other income.
Whether or not the issuer sends a Form 1099-C because the canceled debt is less than $600, canceled debt must be reported as taxable income on annual tax returns.
(Also) In some cases, mortgage debt is exempt from taxation giving people tax debt relief. Under the Mortgage Forgiveness Debt Relief Act (MFDRA), mortgage debts canceled by lenders could be excluded from taxpayers' income.
Income tax exemptions may be available for any canceled mortgage debt of up to $2 million.
Also read -Form 1098 - Mortgage Interest Statement.
What info is included on Form 1099-C?
Details of creditors and debtors like name, address, tax identification number, and account number can be found on the left side of the form.
There are seven boxes on the right side of the form:
- Box 1: Date of identifiable event. Date of debt cancellation or forgiveness.
- Box 2: Amount of debt discharged. The amount of debt forgiven.
- Box 3: Interest, if included in box 2. Report interest if it was included in the discharged amount.
- Box 4: Debt description. Information about the canceled debt.
- Box 5: Check here if the debtor was personally liable for repayment of the debt. This box indicates whether you were personally responsible for the debt.
- Box 6: Identifiable event code. Use this box to describe the cancellation reason.
- Box 7: Fair market value of property. If the loan was for a house, auto, or other item associated with the debt, enter its fair market value here.
Form 1099-C preview
The following are exceptions to when the discharged debt is not taxable:
- Bankruptcy
- Insolvency (if an individual's total liabilities exceed their total assets at the time of debt forgiveness)
- Non-recourse debt (a debt that is secured by collateral that the lender cannot go after in case of default, the discharged debt may not be considered taxable income)
- Public service loan forgiveness
- Qualified farm indebtedness
- Qualified real property business indebtedness
- Qualified principal residence indebtedness
- Forgiven student loans (under the American Rescue Plan, forgiven student loans may not be considered taxable income through 2025).
Who gets Form 1099-C & why?
The 1099-C comes in three copies. A commercial lender must file Copy A with the IRS, send you Copy B, and retain Copy C. If at least $600 of your debt has been canceled or forgiven, you should receive Form 1099-C from that lender.
There are some debt cancellations that do not require a 1099-C form. You may receive this form in the mail, as a result of a debt cancellation during the previous tax year.
The 1099-C form should have a code in box 6 to identify why you received it. There are instructions and information provided by the IRS regarding 1099-C forms and cancellation of debts in general.
This includes a list of possible codes to look for in Box 6:
- A - Bankruptcy (title 11 bankruptcy case)
- B - Other judicial debt relief
- C - Statute of limitations or expiration of deficiency period
- D - Foreclosure election
- E - Debt relief from probate or similar proceeding
- F - By agreement
- G - Decision or policy to discontinue collection
- H - Other actual discharge before an identifiable event.
How to File Form 1099-C?
The creditor will send you the 1099-C form following the cancellation of your mortgage debt. On your Form 1040 or 1040-SR, put the amount from Box 1 of 1099-C under the "Other income" line.
NOTE! Even if the canceled debt has been less than $600 and you haven't received the Form 1099-C for it, you still need to include it in your income.
In the year following the cancellation or forgiveness of the debt, you should receive Form 1099-C by January 31. Verify that your 1099-C contains the correct information. Contact the lender if the form is incorrect.
To ensure your tax return is accurate, make sure you include the canceled debt.
Pro Tip: If you didn't receive Form 1099-C, reach out to your creditor.
What if I have problems with my 1099-C?
If you have problems with your 1099-C tax form, there are a few steps you can take to resolve the issue.
First, double-check that all of the information on the form is correct, including your name, Social Security number, and the amount of debt that was discharged. If you find an error, contact the issuer of the form to request a corrected version.
Another option is to file a Form 982, which is used to claim an exclusion or reduction of the discharge of indebtedness income reported on the 1099-C.
NB! It's important to address any issues with your 1099-C form as soon as possible to avoid penalties or additional interest. If you're still having problems consider consulting with a tax professional.
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FAQ
1. What to do if you don’t receive a 1099-C?
If you don't receive a 1099-C but know you have forgiven debts over $600, you're still responsible for reporting that debt on your federal tax returns.
2. How much tax do you pay on a 1099-C?
The tax rate for a 1099-C includes a 12.4% social security tax and a 2.9% Medicare tax. Self-employed individuals are subject to this regardless of their tax brackets.
3. How can I avoid paying taxes on a canceled debt?
To potentially avoid taxation on forgiven debt, explore options like discharged debt from Chapter 11 bankruptcy proceedings, such as in Chapter 7 or Chapter 13 cases, where you're no longer liable for the debt.
4. What’s the 1099-C Statute of Limitations?
There's no specific statute of limitations for canceled debt, but IRS rules require creditors to file a 1099-C the year following the calendar year in which a qualifying event occurs.
5. Does 1099-C affect my credit?
A 1099-C form itself doesn't affect your credit score. However, the preceding financial activities, like missed payments, leading to the issuance of a 1099-C might impact your credit.
6. What is a debt forgiveness program and who is eligible for it?
The IRS debt forgiveness program aids taxpayers owing the IRS. Eligibility includes those with debts $50,000 and income $100,000 (single) or $200,000 (married), or self-employed individuals with a 25% income loss.
