1099-C Forms and Forgiven Debt – It Isn’t Always Taxable

The 1099-C form is often a surprise when received in the mail.  There are a number of situations which may result in a taxpayer receiving a 1099-C in the mail.  For instance,

• You negotiate with your credit card company and they reduce your debt from $6000 to $2000.  They send you a 1099-C for that $4000 of forgiven debt.
• You negotiate with your mortgage company and receive a loan modification where the balance of your mortgage is reduced.  These can be fairly large, over $10,000 is not uncommon.  You receive a 1099-C for the amount forgiven.
• You buy a nice Harley but get laid off and can’t pay for it.  The loan company repossesses the motorcycle and sells if for $4000 less than the amount owed.

In all these cases, there is forgiven debt and a 1099-C is generated.  The instructions for the 1099-C say the income shown in box 2 should go on line 21 of your 1040 and is counted as taxable income.  Ouch!!  You thought you were off the hook when you reduced your liablility but now you have a big tax bill that can be 20-40% of the original debt.

Can anything be done?  The answer in many cases is yes!!  Under the right circumstances, some or all of the taxes due to the 1099-C form can be eliminated due to IRS allowed exclusions of some or all of the reported 1099-C income.

There are a number of potential income exclusions but the most common we see in our firm are exclusions for 1) insolvency, where your liabilities exceed your assets and 2) for discharge of debt due to principal residence indebtedness.

If you have received a 1099-C, give us a call before you pay those taxes.  We can help you determine if the discharged debt is excludable and thus not taxable.

Even if you have filed and paid the tax for 1099-C income, if an exclusion applies, we can file an amended return and get you a refund.

NOTE Refunds for amended returns will not be paid if the amended return is filed more than 3 years after the return was filed or two years after the tax was paid, whichever is later.

Now, find that 1099-C and your tax return and give us a call.