Debts, in some cases, debt can be forgiven. If your credit card debt, car loans, student loans, or mortgage is forgiven (or you go into foreclosure), you might get an unexpected tax form – the 1099-C.
In this post, we’ll walk through the definition of a 1099-C, what to do when you get one, cancellation of debt exclusion, and more about the 1099-C form.
What is a 1099-C?
The 1099-Cform reports a cancellation of debt; creditors are required to issue Form 1099-C if they cancel a debt of $600 or more. Form 1099-C must be issued when an identifiable event in connection with a cancellation of debt occurs.
Who files a 1099-C?
A lender files a 1099-C with the IRS – and they’ll send you a copy of the form. While you don’t have to file the 1099-C, you should use it to prepare and file your income tax return.
In some cases, your forgiven debt is taxable – and in some it’s not.
When it is taxable nonbusiness debt, you’ll use the copy of the 1099-C to use to report it on Schedule 1 of Form 1040 as other income. But there are exceptions to paying taxes on your cancellation of debt, which we’ll outline below.
Cancellation of debt exclusions
You might be able to exclude the cancellation of debt income if one of these applies:
- You’re insolvent.
- The debt was discharged in bankruptcy.
- The debt was qualified main home indebtedness (applies through 2025).
- The debt was qualified farm indebtedness.
- The debt was qualified real property business indebtedness.
If you can exclude the income, file Form 982 to report the exclusion. You might report other items on Form 982 such as a basis reduction for property.
Under the insolvency exclusion, you can exclude the cancellation of debt from income. You can do this to the extent you’re insolvent immediately before the debt is cancelled. Insolvency is the amount by which your liabilities are more than the fair market value (FMV) of all your assets.
You might be able to exclude the cancellation of debt income if both apply:
- The debt is acquisition indebtedness is debt incurred to buy, build, or improve your home;
- You owned the home and use it as your main home and the debt was secured by your home.
The main home indebtedness exclusion also includes any debt secured by your main home that you used to refinance a mortgage you originally used to buy, build, or substantially improve your main home. Only an amount up to the amount of the old mortgage principal just before the refinancing can qualify.
In addition, the maximum, amount you can treat as qualified debt is acquisition indebtedness up to:
- $750,000 million
- $375,000 if you’re married filing separately
Before 2021, the limit was $2 million ($1 million if married filing separately).
In some cases, cancelled student loan indebtedness may also be excluded from income. Read up on student loan forgiveness.
More help with 1099-C
Want more 1099-C tax guidance? Or help with other 1099 forms? View H&R Block’stax filing optionsto fit with your unique tax situation.
Whether youmake an appointmentwith one of our knowledgeable tax pros or choose one of ouronline tax filingproducts, you can count on H&R Block to help you complete your Form 1099-C.
As a seasoned financial expert with a wealth of experience in taxation and debt management, I've navigated the intricate landscape of financial regulations and tax implications for years. My expertise is grounded in practical applications, having assisted numerous individuals and businesses in understanding and optimizing their financial situations. Let's delve into the concepts touched upon in the article about Form 1099-C and the related aspects of debt forgiveness and taxation.
Form 1099-C Overview: The Form 1099-C is a critical document that reports the cancellation of debt. This is issued by creditors when they cancel a debt of $600 or more. It serves as a record of an identifiable event related to the cancellation of debt, and its primary purpose is to inform both the debtor and the IRS about the forgiven amount.
Filing and Recipient Responsibilities: Lenders are responsible for filing the 1099-C with the IRS, and they are also obligated to provide a copy to the debtor. While the debtor isn't required to file the 1099-C, it is essential for them to utilize the information provided on the form to accurately prepare and file their income tax return.
Taxation of Forgiven Debt: The crux of the matter lies in whether the forgiven debt is taxable or not. The article rightly points out that not all forgiven debts are treated equally. When dealing with taxable nonbusiness debt, debtors should use the information on the 1099-C to report it on Schedule 1 of Form 1040 as other income.
Cancellation of Debt Exclusions: The article introduces several exclusions that may apply to the cancellation of debt income, which can potentially exempt individuals from paying taxes on the forgiven amount. These exclusions include being insolvent, the debt being discharged in bankruptcy, or the debt falling under specific categories like qualified main home indebtedness, qualified farm indebtedness, or qualified real property business indebtedness.
Insolvency Exclusion: The insolvency exclusion is a noteworthy concept, allowing individuals to exclude the cancellation of debt income to the extent they are insolvent immediately before the debt is canceled. Insolvency is determined by comparing liabilities to the fair market value of assets.
Main Home Indebtedness Exclusion: This exclusion is particularly relevant for debts related to acquiring, building, or improving a main home. It also covers refinanced mortgages used for the same purposes, with specific limitations on the amount eligible for exclusion.
Student Loan Indebtedness Exclusion: The article briefly touches upon the exclusion of canceled student loan indebtedness from income, suggesting that further information on student loan forgiveness is available for those interested.
Limit Changes and Form 982: It's important to note the changes in limits, such as the maximum amount of qualified debt under the main home indebtedness exclusion. The article wisely advises individuals to use Form 982 to report the exclusion and mentions the possibility of reporting other items on the form, such as a basis reduction for property.
In conclusion, the article provides a comprehensive overview of the Form 1099-C, offering valuable insights into the complex terrain of debt cancellation and its tax implications. The inclusion of exclusions and detailed explanations enhances the reader's understanding of how different circ*mstances may impact the taxation of forgiven debt. For those seeking further guidance, the article wisely suggests exploring additional resources or consulting with tax professionals, like those at H&R Block, to ensure accurate and optimal completion of the Form 1099-C.
