What Does It Mean When You Receive A 1099-C Form For a Cancelled Debt?
Creditors and debt collectors like to intimidate people with the threat of receiving a 1099-C tax form, but what is this form and what does it actually mean for income tax liability?
A 1099-C form is simply a notice that a creditor has written off a debt you owe. When creditors cancel or forgive a debt over 600 dollars and they take a loss for this debt on their own tax returns, they're required to send you this form. Think of it as their way of telling both you and the IRS "we have written off this debt and have categorized it as a loss on our books."
Unfotunately, receiving a 1099-C does not by itself cancel your contractual obligation to pay the debt. It also does not mean efforts to collect the debt have to stop. Debts are sometimes sold on and pursued after a 1099-C has been issued. If a debt collector contacts you about a debt you have received a 1099-C for, please feel free to contact us and discuss this matter.
While these forms report cancelled debt, you likely won’t have to pay taxes on these amount(s). If your total debts exceed the value of what you own (being “insolvent”), a cancelled debt isn’t counted as taxable income to the extent you are insolvent. For most of the people we serve clients, filing an IRS Form 982 with a tax return eliminates any tax impact from 1099-C income. We’ll guide you through the process below.
If you are required to file a tax return this year, you will want to follow the steps set forth below to see whether or not you are insolvent (your debts are greater than the value of your assets).
If you aren’t sure whether or not you have to file taxes for the previous year, we strongly suggest using the IRS’ free tool for establishing whether or not you need to file taxes for the previous year. Here is a link to this tool: Check if you need to file a tax return.
If you are required to file taxes, finding out if you are insolvent is worth your time. This is because the IRS considers the amount listed on a 1099-C form as income, to the degree a person’s assets are worth more than their liabilities. We will explain this more below.
This is because for many HELPS clients, filing an IRS Form 982 with the tax return can offset (reduce or eliminate entirely) the income reflected on the 1099-C form.
How to figure out if you are insolvent (use the 4681 worksheet)
The IRS provides a 4681 worksheet to use for adding up your assets and liabilities. You don’t have to use this worksheet, but it is a very helpful tool for determining whether or not you are insolvent. Do not file this worksheet with your tax returns.
Let’s go through our example 4681 worksheet to explain how we find our total liabilities and assets.
- Liabilities: Enter the approximate amounts of liabilities for each category listed on the worksheet (lines 1-14). Make sure you include the debts you have given to HELPS. Once you have entered the amounts of your liabilities for each category, add up the amounts in rows 1-14. Put the result on line 15. This is your total liability.
- Assets: Enter the approximate garage sale or trade-in value for each category of assets listed on lines 16-36. If you own a home, put the value of your house in its current state on line 17.
Do not put the original value or replacement cost of your assets. The IRS is interested in the realistic resale value of what you own. For most of us, our household goods, while personally important, do not have a very high resale value, if anything.
Once you have entered the amounts of your assets for each category, add the amounts in rows 16-36 together. Put this number on line 37. This is the total value of your assets.
Amount of insolvency: Subtract the total value of your assets (line 37) from the total amount of your liabilities (line 15), and put the answer on line 38. If that number is greater than zero, you are insolvent by that amount. If it is zero or less, you are not insolvent.
E.G. Emily J. Taxpayer has 21,100 dollars of assets and 71,300 dollars of liabilities. The amount of her insolvency is 50,200 dollars. (71,300 − 21,100 = 50,200)
- If you are insolvent: Fill out form 982 (explained further below).
- If you are not insolvent: Make sure you did not overvalue your assets. Double check your math. If you still find that your assets are worth more than your liabilities, you do not need to fill out form 982. The canceled debt listed on the form 1099-C does count as income.
If including the 1099-C income on your tax returns results in a balance owed, do not despair. The odds are very high that you will be eligible for currently not collectible status with the IRS, discussed at the end of this page.
How to fill out Form 982
Now that you’ve figured out the amount of your insolvency, it’s time to fill out form 982.
Line 1b is checked
Check the box on line 1b if the discharge of indebtedness occurred while you were insolvent. Emily was not involved with a title 11 case (a bankruptcy filing). She is insolvent, so 1b should be checked.
Line 2: Total amount of insolvency
Put the total amount of your insolvency on line 2. For our example, Emily put 50,200 dollars on line 2.
Line 10a: Total amount of insolvency
The IRS instructs to put the total amount of insolvency here if you have not reduced the values of your assets for any other reason on this form. Emily put the total amount of her insolvency on line 10a.
Congratulations! Form 982 is now finished. You do not need to fill out Part III of form 982 because you are not a corporation. Please file your completed form 982 with your tax return.
Answers to frequently asked questions
What is insolvency?
Insolvency simply means you owe more than you own. Add up everything you own (car, bank balance, garage sale value of items) and subtract everything you owe (credit cards, medical bills, loans). If you owe more than you own, you’re insolvent.
Why does cancelled debt count as income in the first place?
The IRS views debt forgiveness as a financial gain for a “solvent” taxpayer. However, for those who are insolvent, the IRS provides the exclusions mentioned above.
I am not sure if I need to file taxes or not. How do I figure this out?
Visit the IRS tool here: Check if you need to file a tax return.
The bank forgave a large debt, but I am not insolvent. What do I do?
If you owe a balance, you may qualify for Currently Not Collectible (CNC) status. This means the IRS agrees not to collect the debt for a period of time (often a year, but renewable). You can learn more here: Currently Not Collectible.
To request CNC status, call the IRS at 800-829-1040. It does not cost money to request this.