Tax Dictionary – Form 1099-C, Cancellation of Debt

Tax Dictionary

You received this form because a Federal Government agency or an applicable financial entity (a creditor) has discharged (canceled or forgiven) a debt you owed, or because an identifiable event has occurred that either is or is deemed to be a discharge of a debt of $600 or more. If a creditor has discharged a debt you owed, you are required to include the discharged amount in your income, even if it is less than $600, on the “Other income” line of your Form 1040. However, you may not have to include all of the canceled debt in your income. There are exceptions and exclusions, such as bankruptcy and insolvency.

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If you receive a Form 1099-C, Cancellation of Debt, you will need to determine whether you will be taxed on the amount of your debt that was canceled or forgiven. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments has an insolvency worksheet you can use to determine if all or part of your canceled debt must be included in income. The worksheet compares your total assets and your total liabilities.

If your liabilities are more than your assets immediately before your debt was canceled, you will not be required to pay taxes on the amount of the debt by which your liabilities exceed your assets. You must still include the income on your tax return, but you will use Form 982, Reduction of Attributes Due to Discharge of Indebtedness to exclude the appropriate amount. Example: Assets = $15,000, Liabilities = $25,000 – you can exclude up to $10,000 in canceled debt from your income on your tax return.

Form 1099-C’s are commonly omitted from tax returns, resulting in the IRS sending notice CP2000. Learn how to handle an underreporter inquiry (CP2000).

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