What’s a Form 1099-C and Why Was I Sent One?
If you settled a debt for less than you owed, you may owe taxes on itBy Judy Malmon, J.D. | Last updated on January 27, 2023
Use these links to jump to different sections:Kevan McLaughlin. “The general rule is when you got the line of credit—loan, mortgage, whatever—there’s no tax because it carries with it the reciprocal obligation to repay it. If you don’t repay it, the government looks at that as money in your pocket, and you have to pay tax on that. So, you’re paying tax on something and you don’t have the cash. It’s taxed as ordinary income, up to the amount of the debt that was forgiven.” If you settled a debt with a lender or credit card company, they are required to notify the IRS of the debt settlement and send you an IRS Form 1099-C, Cancellation of Debt tax form . It is not a good idea to pretend you didn’t get it. There may, however, be an exception to having to pay the tax.
Exclusions & Exceptions“If you were insolvent the moment before the debt was forgiven, it’s not taxable income,” McLaughlin add. “Insolvency is defined as your liabilities exceed your assets.” However, you would still need to account for the write-off in other ways on your balance sheet. “There’s a sequence where you have to reduce your tax attributes of other assets, although it’s not income to you. For example, if you have a $100,000 debt forgiven, if you are solvent, that’s $100,000 of ordinary income. If you have $100,000 debt forgiven and you are insolvent, it’s not income, but you have to reduce other assets by $100,000.” A debt reduction or cancellation may also be excluded from taxable income if your debt comes under one of the following:
- Qualified farm indebtedness
- Qualified real estate business debt
- Qualified home loan that was discharged before January 1
- Qualified student loan forgiveness programs (e.g. working in a listed profession for certain employers for a designated amount of time, or providing health services in designated locations)
- Cancelled debt that would be tax deductible if paid
- Reduction in the purchase price provided by the seller
- Debt cancellation that is a gift, bequest, devise or inheritance
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