by Deborah Ritz, Independent Tax Preparer
I have received a 1099-C. What is it, and do I owe income taxes on it?
A 1099-C is sent by a creditor to inform you that it’s going to write-off the remaining unpaid portion of your debt. It’s filed by the creditor to the IRS when a settlement agreement between a debtor and a creditor has been reached, or when a creditor determines that a debt won’t ever be paid.
Creditors who forgive $600 or more are required to file Form 1099-C with the IRS. According to the IRS, if a debt is canceled, forgiven or discharged, you must include the canceled amount in your gross income, and pay taxes on that “income,” unless you qualify for an exclusion or exception.
Canceled Debt that Qualifies for Exclusion to Gross Income:
1. Cancellation of qualified principal residence indebtedness.
2. Debt canceled in a Title 11 bankruptcy case. (including chapter 7)
3. Debt canceled due to insolvency. (insolvency means that a person’s liabilities exceed their assets)
4. Cancellation of qualified farm indebtedness.
5. Cancellation of qualified real property business indebtedness.
Canceled Debt that Qualifies for Exception to Inclusion in Gross Income:
1. Amounts specifically excluded from income by law such as gifts or bequests
2. Cancellation of certain “qualified” student loans
3. Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
4. A qualified purchase price reduction given by a seller
The potentially tricky part is figuring out whether you qualify for an exclusion or exception. If you don’t get it right (or ignore it all together), you may pay more in taxes than you have to.
Hint: Most taxpayers that qualify for exclusion of the forgiven debt will fall under #1, debt canceled in Title 11 bankruptcy; or #2, insolvency.
An estimated 40 to 60 percent of the people who receive a 1099-C don’t owe tax on the forgiven amount.
For further information check on the IRS site www.irs.gov for the most up-to-date information, call an IRS Representative at 1-800-829-1040 or consult a professional tax preparer.
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Questions for Deborah Ritz can be e-mailed to WeeklyADK@yahoo.com
