What is A 1099-C?

You may be familiar with form 1099 if you have ever done work as an independent contractor. However, there are reasons you may receive a form 1099. Having a portion of your credit debt forgiven is one of those times. Anyone who has had debt cancelled in the previous tax year may get a form 1099-C. What exactly is the purpose of this form?

Your Forgiven Debt May Count As Income

Any debt that is forgiven or canceled may be considered as taxable income. This is because any portion of your debt forgiven will be considered as income gained. Your gained income will go on your form 1040 when filling out your tax return. Anyone who has debt forgiven should be aware of the potential tax implications.us income tax return

Who will get a form 1099-C? A debtor who has more than $600 in debt forgiven is required by law to get this form. You are responsible for documenting this income even if you don’t get anything from your creditors. Chances are good that the IRS has gotten this from even if you have not.

Exceptions To The Rule

There are a few exceptions that may allow you to avoid paying taxes on your forgiven debt. For example, you will most likely be able to avoid paying taxes if the loan was for improvements to your home. Debts that relate to business property may also be exempt from taxes.

Any debt that could be forgiven in a Chapter 11 bankruptcy case are usually exempt from taxes as well. This basically means that any forgiven debt related to personal or business property can be exempt from taxes.

Your forgiven debt is also going to be forgiven if you can prove insolvency. However, your tax burden is waived only up to the amount your are in debt.

How To Calculate Insolvency

The first step is to calculate the total of all your debts. Subtract the value of your assets from the number. A positive number indicates you are still solvent or have a positive net worth. None of your forgiven debt will be exempt from income tax. A negative number indicates that you are insolvent or have a negative net worth. You are exempt from paying income tax on your debt up to the amount you are insolvent.

Say you have $50,000 in outstanding debt and $40,000 in current assets. This would cause you to be insolvent by $10,000. Having $8,000 of your debt cancelled would leave you with no tax liability on that cancelled debt. Getting $17,000 of debt relief would cause you to owe tax on $7,000.

Consequences Of Ignoring A 1099-C

Never ignore a 1099-C that you get in the mail. Failure to report income can increase your chances of getting an IRS audit. The IRS will then add penalties and interest on top of whatever tax liability you have. Talk to a CPA or tax attorney if you are not sure how to proceed.

Contact your creditors to ensure that your debt has been forgiven. Some creditors will send this form when they discharge your debt. It does not always mean you are off the hook for the debt. It just means that the IRS has considered the debt discharged for tax purposes.

Disregarding a tax form can have serious consequences. Understand that this form is for more than just your records. It indicates a potential source of income that needs to be documented on your return. Failure to do so will create a new debt for yourself.

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