Knowing how tax documents work can save you a lot of trouble with the IRS. The 1099-C form deals with canceled or forgiven debt from the previous tax year. Find out what you need to know about this form and how canceled debt relates to taxes.
In This Piece:
- What Is a 1099-C Form?
- Why Did You Get a 1099-C Form?
- What Should You Do With a 1099-C Form?
- Who Can File a 1099-C Form?
- How to File a 1099-C Form
- How to Read a 1099-C Form
- What Canceled Debt Isn’t Taxable?
- What to Do If You Received a 1099-C Form after Filing Your Taxes
- What’s the 1099-C Statute of Limitations?
- Is a 1099-C Form Good or Bad for Your Credit?
- Get Tax Help if You Receive a 1099-C
What Is a 1099-C Form?
Form 1099-C is a tax form required by the IRS in certain situations where your debts have been forgiven or canceled. The IRS requires a 1099-C form for certain acts of debt forgiveness because it considers that forgiven debt as a form of income.
For example, if you borrowed $12,000 for a personal loan and only paid back $6,000, you still received the original $12,000. If that unpaid debt was forgiven or canceled, not paying back the other half of the loan means you still got the benefit of that money without paying for it. As a result, the IRS considers that to be income in many cases.
Why Did You Get a 1099-C Form?
Not every debt cancellation involves a 1099-C form. But if you received this form in the mail, it’s because of a debt cancellation that occurred at some point during the previous tax year.
Box 6 on the 1099-C form should have a code to help you determine why you received the form. You can also learn more about 1099-C cancellation of debt processes and the reasons you might receive such a form if you’re not sure whether yours is accurate.
What Should You Do With a 1099-C Form?
You should never ignore any tax form you receive, as each might have positive or negative implications on your tax return. But you also shouldn’t panic if you receive a 1099-C form indicating a large amount of income. It doesn’t necessarily mean you’ll owe a lot more in taxes.
First, find out whether the type of debt cancellation on the 1099-C form is excluded from taxable income. The IRS provides a list of exclusions, which include debts that were forgiven because you were insolvent or involved in certain types of bankruptcies. You may want to double-check with your bankruptcy lawyer about whether you need to claim 1099-C income relevant to your bankruptcy discharge.
Once you know whether you need to claim the income or not, you must incorporate the 1099-C into your federal tax filing. If the canceled debt doesn’t fall under an exclusion, you report it as “other income” on your tax return.
That income will be included with your other income in determining how much tax you must pay for the year. In short, you’ll have to pay taxes on the extra income. That might mean your refund is reduced or you owe more taxes than you would otherwise.
In cases where the 1099-C canceled debt falls under an IRS exclusion—which means you don’t have to pay taxes on all or some of the income—you still may need to file a form. The creditor that sent you the 1099-C also sent a copy to the IRS. If you don’t acknowledge the form and income on your own tax filing, it could raise a red flag. Red flags could result in an audit or having to prove to the IRS later that you didn’t owe taxes on that money.
Luckily, the IRS provides a form for this purpose. It’s Form 982, the Reduction of Tax Attributes Due to Discharge of Indebtedness.
Who Can File a 1099-C Form?
According to the IRS, you can file a 1099-C form if you’ve forgiven or canceled at least $600 in debt for an individual or entity in the previous tax year. You also have to be an applicable financial entity, such as a bank or credit union. For example, you don’t need to file a 1099-C form if you loaned your brother $1,000 and then told him on his birthday you’ve decided he doesn’t have to pay you back.
How to File a 1099-C Form
If you receive a 1099-C form, you must include it in your tax filing process. This is because many forms of canceled debt are treated like income, so your forgiven debt can impact how much you owe in taxes.
How you include your 1099-C depends on how you already file your taxes. Online tax filing programs include options for adding the 1099-C form when you file. Typically, you do this when entering various types of income.
Even if your debt cancellation falls under an exclusion, you should still file the 1099-C form. This allows the IRS to note that the form existed, you acknowledged it, and it was excluded. Failing to include the form could create red flags and mismatched IRS records, potentially leading to an audit.
You may need to file form 982 if you have exclusions to ensure you don’t pay more than you need to. Tax filings can be complex even when you aren’t dealing with canceled debt, so getting help from a tax professional or using tax software that walks you through the process can help minimize any mistakes that can leave refund dollars on the table or get you into hot water with the IRS.
How to Read a 1099-C Form
Knowing how to read your 1099-C may help you understand why you got one and what you have to do with it. Here’s a breakdown of what each box means:
- Box 1. This box tells you the date the debt was officially canceled.
- Box 2. This section includes the amount of debt forgiven.
- Box 3. You may also have to claim interest owed on forgiven debt, which is included in Box 3.
- Box 4. Here is where you’ll find a description of the debt.
- Box 5. This box says whether you’re liable for repaying the debt.
- Box 6. This box contains codes identifying the type of debt forgiveness.
- Box 7. This section gives the market value of the property associated with the debt.
Codes that might be included in Box 6 on the 1099-C include:
- A. Bankruptcy Title 11
- 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 identifiable event
What Is Cancellation of Debt and What Counts as “Canceled Debt?”
Cancellation of debt happens when a creditor discharges or forgives a debt you haven’t paid off. The IRS notes that cancellation can occur when the creditor gives up on collecting because it’s exhausted its resources and been unable to collect. In some cases, cancellation can come about as an agreement between you and the creditor.
What Is the Mortgage Forgiveness Debt Relief Act?
The Mortgage Forgiveness Debt Relief Act of 2007 generally excludes all forgiven debt on the mortgage of your primary residence. That means you may not have to include canceled debt on your mortgage as part of your income on your taxes. For example, if your debt is reduced through a restructuring of your mortgage or in connection with a foreclosure, it may be excluded.
This is one of the most common exclusions, but there are a few other situations where you don’t have to include canceled debt.
What Canceled Debt Isn’t Taxable?
You should never ignore any tax form you receive, as each might have positive or negative implications on your tax return. But you also shouldn’t panic if you receive a 1099-C form indicating a large amount of income from debt. It doesn’t necessarily mean you’ll owe a lot more in taxes.
Some types of debt cancellation on the 1099-C form are excluded from taxable income. The IRS provides a list of exclusions, which include debts that were forgiven because you were insolvent or involved in certain types of bankruptcies. You may want to double-check with your bankruptcy lawyer about whether you need to claim 1099-C income relevant to your bankruptcy discharge.
What to Do If You Received a 1099-C Form after Filing Your Taxes
If you don’t know a 1099-C form is coming—and many people don’t realize they might receive one—you could file your taxes before it arrives. If you receive the form after you file, you should file an amended return. That’s true even if the 1099-C doesn’t change your tax obligation, as you’ll want to get the Form 982 on record for documentation purposes.
The IRS also allows amended tax returns to be e-filed, making it even easier to quickly file an amendment. However, you can only amend 2020, 2021, and 2022 returns in this manner.
What’s the 1099-C Statute of Limitations?
There aren’t really statutes of limitations on cancellation of debt, though the IRS does have rules about when these forms should be filed. The creditor must file a 1099-C the year following the calendar year when a qualifying event occurs. That just means the creditor must file the next year if they discharge or forgive a debt.
If the creditor files a 1099-C with the IRS, it typically must provide you with a copy by January 31 so you have it for tax filing purposes that year. This is similar to the rule for W-2s from employers.
However, there’s no rule for how long a creditor can carry debt on its books before it decides it’s uncollectible. So, if your debt isn’t canceled via repossession, bankruptcy, or other processes, cancellation could happen at any time. The creditor doesn’t have to tell you about it other than sending the 1099-C.
Is a 1099-C Form Good or Bad for Your Credit?
The 1099-C form shouldn’t have any impact on your credit. However, the activity that led to the 1099-C probably does impact your credit. Typically, by the time a creditor forgives a debt, you’ve engaged in at least one of the following activities:
- Failed to make payments for an extended period of time.
- Negotiated a settlement on the debt.
- Entered into a program with the creditor because you can’t pay the debt, such as a home short sale or voluntary repossession.
- Been sent to collections.
- Had a foreclosure or repossession.
- Gone through bankruptcy.
All those are negative items that can impact your credit report and score for years. So, while getting a 1099-C itself doesn’t change your credit at all, you’ve probably already experienced a negative hit to your score.
What If You Receive a 1099-C Form on an Old Debt?
There aren’t statutes of limitations on the cancellation of debt, though the IRS does have rules about when these forms should be filed. The creditor must file a 1099-C the year following the calendar year when a qualifying event occurs. That just means the creditor must file the next year if they discharge or forgive a debt.
If the creditor files a 1099-C with the IRS, it typically must provide you with a copy by January 31 so you have it for tax filing purposes that year. This is similar to the rule for W-2s from employers and other tax forms.
However, there’s no rule for how long a creditor can carry debt on its books before it decides it’s uncollectible. So, if your debt isn’t canceled via repossession, bankruptcy or other such processes, cancellation could happen at any time. The creditor doesn’t have to tell you about it other than sending the 1099-C.
What If You Don’t Get Your 1099-C?
You may not receive a 1099-C or might receive it after you already filed your taxes. If you receive the form after you file, you should file an amended return. That’s true even if the 1099-C doesn’t change your tax obligation, as you want to get a Form 982 detailing the reasons for exclusion on record for documentation purposes. If you don’t receive a form at all, it may mean the creditor didn’t send one and you don’t have to file.
What If You Have a Canceled Debt That Is Less Than $600?
Canceled debt less than $600 still needs to be reported as income on your taxes, though you may not receive a 1099-C for it. Working with tax professionals may be a good idea if it’s unclear which form you should use and what income you need to claim.
What If You Misplaced Your 1099-C?
You should be able to contact the associated creditor for a copy of your 1099-C form if you lose it. If you can’t reach them or retrieve a copy, you may have to call the IRS to resolve the issue.
What If You Don’t Include Your 1099-C on Your Taxes?
If you forget your 1099-C, you may be able to amend your return and correct the situation. Depending on how long the form is left off your taxes, the IRS may conduct an audit.
What If Your 1099-C Form Is Incorrect?
If your form is incorrect, you should contact the creditor to send a corrected version. If the creditor doesn’t send it before the tax deadline so you can file with the correct information, you’ll need to file an amended return when you receive it.
Though receiving a 1099-C doesn’t hurt your credit, the canceled debt that led to it probably will. It’s best to find other solutions to debt than delinquency or cancellation. You may be able to negotiate, refinance or restructure your debt to make it more manageable.
Get Tax Help if You Receive a 1099-C
As with other tax topics, the 1099-C can be complicated. It’s a good idea to work with a professional when dealing with complicated tax matters or trying to reduce your tax burden legally.
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