Filing Your Taxes? Think About the 1099-C Tax Consequences

tax time ahead

This is the time of year that people start thinking about filing taxes and preparing themselves so they will not be hit as hard. To avoid as many unpleasant surprises as possible, it is important that you take into consideration a 1099-C, and what it could mean for your tax return. If you received a 1099-C in the mail at any point last year, hopefully, you placed it in a safe place along with the rest of your tax documents. You should also know about the exceptions and exclusions that are attached to this type of notification.

What Is a 1099-C?

If you had any debt forgiven by a creditor or debt collector last year, you have likely received, or will soon receive, a 1099-C. This form outlines the debt that was forgiven and, more importantly, tells the IRS about it. The IRS considers forgiven debt taxable income, which means you will have to pay taxes on it at tax time. So, how does the IRS know about your forgiven debt?

Once you reach a debt settlement, the creditor or debt collector will send a 1099-C to the IRS. Typically, in order for the creditor to send a 1099-C to the IRS, the debt forgiven must exceed $600. Most of the time, a creditor or debt collector will also send you a 1099-C form. In case they do not, it is always a good idea to keep track of the amount of debt that has been forgiven.

Under no circumstances should you ever ignore a 1099-C, or fail to include forgiven debt on a tax return. If you do and the IRS learns of the forgiven debt, they will treat it as income that you did not report and will likely assume that you did so in order to pay less in taxes. This has serious consequences, including penalties and interest that will most likely far outweigh the amount of forgiven debt. You may face even harsher penalties such as an audit, or worse.

Exclusions and Exceptions to the 1099-C

Although a 1099-C usually means that you will have to pay taxes on certain debt, there are some exclusions and exceptions. One of the main exceptions is insolvency. Being insolvent simply means that you have more debt than assets. However, the debt forgiven must be less than the amount you are insolvent by.

For example, if you have $40,000 worth of debt and have assets valued at $35,000, you are insolvent by $5,000. If a creditor decides to forgive $3,000, you are not required to report it because the amount forgiven is lower than the amount you are insolvent by. However, if your debts and assets remained the same as in the previous example and a creditor forgave a debt of $10,000, you would be required to report $5,000 of that debt because it exceeds your insolvency.

You are also not required to report any debt that was discharged through bankruptcy. This is due to the fact that debts included in your bankruptcy case are not forgiven, but discharged through liquidation or reorganization. This allows you to exclude them from your 1099-C.

Lastly, if you were gifted money from friends or a family member, you also do not need to report it on your tax return. However, the money must have been given without the expectation that you would pay it back, either in whole or in part, at any time.

1099-C Consequences When Student Loan Debt Is Forgiven

Although student loans are considered ‘good debt’ because they help you get further in life and make you a better person, they are still a loan and they are still considered debt by the federal government. As such, if you have had any portion of your student loan debt forgiven during the tax year, in most cases you will have to report this as well. It is important, though, to know that there are also certain exemptions for this.

The first exemption pertains to any loan made by a tax-exempt entity. This entity can include a loan that came directly from a school or company or a federally-funded student loan. These loans are exempt from appearing on your tax return if any portion of them was forgiven.

Additionally, certain provisions of the loan may also exempt it from taxes. For example, if you took out the loan to go into a certain profession, you do not have to report it on your tax return, even if a portion of it was forgiven. Also, if you agreed to work for a certain employer once you graduated, and you had a certain portion of your student loan forgiven, this could also be exempt from your tax returns.

Like all other debts, if any portion of your student loan was discharged as a result of bankruptcy, you are also not required to report this forgiven debt on your tax return. However, also like other debt, this student loan must have been included within the bankruptcy case when you filed.

It is important to understand that any time debt is forgiven and it is eligible to be exempt from your tax return, you must fill out Form 982 and submit it to the IRS. Otherwise, it will still look like you are simply trying to hide the income and you could face the negative consequences that come with doing so.

Still Have Unforgiven Debt? Call Our Florida Debt Defense Lawyers

Having debt forgiven can be a real relief, but if you still have debt hanging over your head and are worried that a debt collector will take action, call our Fort Lauderdale debt defense attorneys. At Loan Lawyers, we know how to negotiate a settlement with debt collectors and can advise on any implications that may have. If a debt collecting has already taken legal action against you, we can provide a solid defense for that, as well. If you have unforgiven and unmanageable debt, call us today at (954) 523-HELP (4357) to schedule your free consultation.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation and find out more about our money-back guarantee on credit card debt buyer lawsuits, and how we may be able to help you.