Have you ever received a 1099C for cancellation of debt and wondered what to do about it?
Well, for starters, the reason why you likely got the 1099 C is because you negotiated your credit card down or any other debt that you have for less than what you legally owed by discharge, forgiveness or cancellation of the debt. If you own property subject to a debt, cancellation of the debt also may occur because of a foreclosure, a repossession, a voluntary transfer of the property to the lender, abandonment of the property, or a mortgage modification. It saved you money up front, but the IRS says that the remaining debt must be included on your tax return and treated as ordinary income unless you fall under certain exclusions or exceptions.
The following do not fall under the definition of cancellation of income:
1. Amounts canceled as gifts, bequests, devises, or inheritances
2. Certain qualified student loans canceled under the loan provisions that the loans would be canceled if you work for a certain period of time in certain professions for a broad class of employers
Certain other education loan repayment or loan forgiveness programs to help provide health services in certain areas.
3.Amounts of canceled debt that would be deductible if you, as a cash basis taxpayer, paid it
4.A qualified purchase price reduction given by the seller of property to the buyer
5.Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program
The following are cancellation of income, but can be excluded from gross income:
1. Debt canceled in a Title 11 bankruptcy case
2. Debt canceled during insolvency
3. Cancellation of qualified farm indebtedness
4. Cancellation of qualified real property business indebtedness
5. Cancellation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2018.
You will still need to file a 1040 if these exclusions apply and file a Form 982.
Nos. 3-5 typically involve mortgage or other loan modifications and foreclosures.
If you want an example of what not to do with your 1099C, read the linked opinion