Debt cancellation can significantly help borrowers get on top of their finances. You may have had certain debts discharged during a bankruptcy, loan forgiveness program, or other event over the last year. This forgiveness or discharge will often need to be reported as income to the IRS and may be taxable.
Those in this situation will likely receive Form 1099-C from their creditor with information related to the debt discharge. This guide will walk you through what Form 1099-C is, who uses it, and how to understand each section of the form.
Understanding Form 1099-C
Form 1099-C, Cancellation of Debt, is used by lenders and creditors to report payments and transactions to the IRS. Canceled Debt typically counts as income for the borrowers, so this income must be reported to taxpayers so they can pay taxes on it in the applicable year. A taxpayer who receives Form 1099-C may need to report the amount shown when filing their annual income tax return. The amount of canceled debt could impact the tax refund they receive, or they may need to pay more tax than they expected.
Form 1099-C works similarly to other 1099s. It is submitted by the lender or entity that canceled or forgave qualifying debt, and the taxpayer then uses the form to report how much of their debt was canceled when they file taxes. Here are a few other requirements to be aware of:
Form 1099-A – Some borrowers may also use Form 1099-A, Acquisition or Abandonment of Secured Property. If $600 of debt was canceled related to a foreclosure or abandonment of secured property, borrowers may only need to file Form 1099-C.
When Is Canceled Debt Non-Taxable? – Sometimes canceled debt may not be taxable and thus doesn’t need to be reported as income. This includes debt such as certain bankruptcy debt, non-recourse loans, student loan forgiveness, insolvency, some farm debts, public service loan forgiveness, and a student loan borrower’s death or permanent disability. For tax year 2020, forgiven Payment Protection Program loans do not count as taxable federal income.
Situations such as the pandemic can lead to abnormally high levels of debt cancellation, so many taxpayers will be facing this form for the first time. It can be wise to get expert help to make sure you’re fulfilling your tax obligations and staying on the right side of the IRS.
7 Sections of Form 1099-C and What They Mean
Box 1: Date of Identifiable Event
Box 2: Amount of Debt Discharged
Box 3: Interest, if Included in Box 2
Box 4: Debt Description
Box 5: Check Here if the Debtor Was Personally Liable for Repayment of the Debt
Box 6: Identifiable Event Code
Box 7: Fair Market Value of Property
Common Mistakes of Form 1099-C
It is always important to be diligent when reviewing tax forms and reporting income to the IRS. Even a small mistake could lead to a penalty or paperwork nightmare, so adhere to the following tips to ensure you’re not making any errors on your 1099-C:
- Double-check that your name, address, and tax ID number are accurate on the form.
- You should receive a separate form from each lender or creditor that forgave debt for you in a given year.
- Always make sure all financial details are correct on Form 1099-C and contact the creditor if something is amiss.
- Even if a lender did not send you this form, you need to report all eligible discharged debt as income on your tax return.
Managing the 1099-C and all your other tax forms can be confusing and frustrating. You may not know if you’ve received everything you need or what you need to report on your tax return. Talking through the preparation of all your tax forms and reporting requirements with a tax professional can ensure accuracy and avoid penalties.
Get Help Filing Form 1099-C
Taxpayers who receive Form 1099-C may have further questions about what each box means and what kinds of tax implications this form has. Reach out to Silver Tax Group to speak to a tax expert about this form or any other tax needs. We provide guidance and representation for a range of tax issues, including filing personal taxes and company taxes, tax consulting, IRS audit defense, emergency tax services, and more.
The post How to Use Tax Form 1099-C to Report Canceled Debt appeared first on Silver Tax Group.
