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In today’s financial landscape, many consumers find themselves grappling with debt. While paying off debt is the ideal scenario, there are situations where debts may be forgiven or canceled. When this happens, it’s crucial to understand the tax implications, particularly concerning Form 1099-C.
Let’s walk you through everything you need to know about Form 1099-C and how it affects the average consumer…
Form 1099-C explained
Form 1099-C, titled “Cancellation of Debt,” is an IRS tax form used to report canceled debts of $600 or more. When a creditor forgives or cancels a debt you owe, they are required to send you this form and file a copy with the IRS. The form reports the amount of debt canceled and the date of cancellation.
Why does this matter to you?
Many consumers are surprised to learn that canceled debt can be considered taxable income. The logic behind this is that when you borrow money, it’s not considered income because you’re expected to pay it back. However, if that debt is forgiven, the IRS views it as if you’ve received income equal to the amount of debt canceled.
Common situations where consumers might receive a 1099-C
- Credit card debt forgiveness: If you settle a credit card debt for less than the full amount owed, the difference may be reported on a 1099-C.
- Mortgage foreclosure or short sale: If your home is foreclosed on or you complete a short sale, the difference between what you owed and what the property sold for might be considered canceled debt.
- Car loan deficiency: If your car is repossessed and sold for less than you owe, the remaining balance might be forgiven and reported on a 1099-C.
- Personal loan forgiveness: If a bank or even a family member forgives a personal loan, this could trigger a 1099-C.
- Student loan forgiveness: While many federal student loan forgiveness programs are tax-free, some types of student loan cancellation may be taxable.
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The tax impact of canceled debt
When you receive a 1099-C, the canceled debt amount is typically reported as “other income” on your tax return. This additional income can:
- Increase your total taxable income.
- Potentially push you into a higher tax bracket.
- Reduce your eligibility for certain tax credits and deductions.
For example, if you had $10,000 of credit card debt canceled, it could be as if you earned an extra $10,000 in income for that tax year.
Exceptions and exclusions
Fortunately, the IRS recognizes that taxing canceled debt can be burdensome for many consumers, especially those already in financial distress. There are several exceptions and exclusions that might allow you to avoid paying taxes on canceled debt:
- Bankruptcy: Debts discharged through bankruptcy are not taxable.
- Insolvency: If you were insolvent (your total debts exceeded the fair market value of your total assets) immediately before the debt was canceled, you might be able to exclude some or all of the canceled debt from your income.
- Qualified principal residence indebtedness: In some cases, canceled debt on your primary home may be excluded.
- Certain farm debts: If you incurred the debt directly from your farming operation and meet certain other criteria, you may be able to exclude it.
- Non-recourse loans: These are loans where the lender’s only recourse in case of default is to repossess the financed property.
What to do if you receive a 1099-C
Following these tips can help make sure you navigate this process efficiently:
- Don’t ignore it: The IRS receives a copy, so it’s important to address it on your tax return.
- Verify the information: Make sure the amount and date on the form are correct. If not, contact the issuer to request a corrected form.
- Determine if you qualify for any exclusions: Review the exceptions listed above and in IRS Publication 4681.
- Complete Form 982: If you qualify for an exclusion, you’ll need to file Form 982 with your tax return.
- Seek professional help: Given the complexity of tax law around canceled debts, it’s often wise to consult with a tax professional or attorney.
Proactive steps for consumers
Here are some actions you can take to protect yourself:
- Understand your debt agreements: When taking on debt, understand the terms and any potential tax implications of default or settlement.
- Keep good records: Maintain accurate records of your debts, payments, and any negotiations with creditors.
- Consider tax implications in debt settlements: If you’re negotiating a debt settlement, factor in potential tax consequences.
- Stay informed: Tax laws change. Stay updated on the rules regarding canceled debt and taxation.
The bottom line
While receiving a 1099-C can be stressful, understanding its implications and your options is crucial for managing your financial health. Canceled debt can provide much-needed relief, but it’s important to be prepared for the potential tax consequences. When in doubt, don’t hesitate to seek advice from a qualified tax professional who can guide you through the complexities of your specific situation.
Remember, financial challenges are often temporary, and with the right information and support, you can navigate these issues and move towards a more stable financial future.
There’s always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
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The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 51% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.