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If you've received a Form 1099-C, don't freak out -- but don't ignore it either.
If a creditor has forgiven or canceled a debt of $600 or more, it is obligated to send you and the IRS a copy of this form. This includes debts discharged in bankruptcy and those forgiven by credit card companies.
Now that you know why you received a Form 1099-C, you need to determine whether or not you must pay taxes on the reported amount.
That's right, canceled and forgiven debt must be included in your gross income, which may ultimately increase your tax liability. Luckily, about 40 to 60% of people who receive a Form 1099-C (or the related 1099-A) aren't required to pay additional taxes, reports Business Insider.
As explained in IRS Publication 4681, you do not need to pay taxes on discharged debt when it falls into one of these general categories:
- Student loans discharged as a result of your profession;
- Most debts canceled in a Chapter 7, 11 or 13 bankruptcy court;
- Debt cancelled while you were insolvent;
- Some farm-related indebtedness;
- Some real property-based business indebtedness; or
- Mortgage modifications, short sales and foreclosures.
If your Form 1099-C debt is subject to an exclusion or exception, you're off the hook. However, you still need to fill out Form 982 and attach it to your tax returns. You don't want the IRS to assume you are illegally failing to report income.
If you're still not sure whether you need to include your Form 1099-C debt, consider talking to a tax preparer. It can often be a complicated analysis that requires professional help.