You pickup your mail and you have a Form 1099-C, Cancellation of Debt This is good news, right? A debt you owed has been cancelled or forgiven and you don’t have to worry about repaying it. Don’t forget the Internal Revenue Service (IRS)! Depending on the reason you received this Form 1009-C, you may (or may) not have to report it to the IRS as taxable income.

The IRS rules mandate (you can check irs.gov) that you receive a Form 1099-C if debt of more than $600 is forgiven by one of the following:

A federal government agency,
A financial institution,
A credit union, or
An organization having a significant trade or business of lending money.

For the most part, you must include these amounts (and any other amounts under $600 that are not reported) on Form 1040 to be included in your taxable income. There are a few exceptions that could save you a lot of money. If you can meet the following situations you don’t have to report your 1099-C amount as taxable income:

Qualified principal residence indebtedness: Under the Mortgage Debt Relief Act of 2007, any loan that that is used to buy, build, or improve your principal residence (the house you live in) from 2007-2012 is not considered taxable income. The debt must be secured by the home. The maximum amount you can claim is $2 million (or $1 million if filing a Single or Married Filing Separately return).

Student loans: There are some student loans that when forgiven or cancelled do not have to be included in your taxable income and reported on your tax return.

Bankruptcy: Any debt that is canceled in a Title 11 bankruptcy case does not have to be included as taxable income.

Insolvency: Canceled debt does not have to be included if you were insolvent at the time of the canceled debt. You can only claim up to the amount for which you were insolvent. For example, if you received a 1099-C for $25,000 and at that time had assets worth $30,000 but liabilities worth $20,000, you could only exclude $10,000 from your taxable income (you were insolvent by $10,000 at the time). The other $15,000 (the original cancellation of $25,000 minus the extent of you insolvency of $10,000) would be treated as taxable income.

Qualified Farm Indebtedness: Certain farm debt that is canceled or forgiven can be excluded from your taxable income.

Qualified Real Property Business Indebtedness: Certain canceled or forgiven qualified real property business indebtedness can be excluded from your taxable income.

Be Sure to Report it… Even if you don’t have to Include it!

Just because you don’t need to include the 1099-C as taxable income, does not mean that you don’t have to report it to the IRS. If a 1099-C you receive qualifies to be excluded from your taxable income, you must be sure to at least report it to the IRS by attaching Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to Form 1040.

Making sure that you report all of your income (both taxable and nontaxalbe) is an important part of making sure that you are in good standing with the IRS and out of tax debt. Be sure that you have included all of your income.

Reed
www.easyIRS.com

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