A 1099 is a tax form that usually indicates the payment of some type of income. Form 1099-C is a type of 1099 that designates the cancellation of a debt. Although in most cases, the IRS considers a canceled debt to be taxable income, in some scenarios a 1099-C will not affect your taxes.
The most common scenarios in which you might receive a 1099-C are if you went through a foreclosure, modified your mortgage or negotiated or settled a credit card debt. Any time a lender reduces the amount you have to pay on a loan, the IRS treats this forgiven debt as income. For example, if your credit card company offers you a settlement of $12,000 on an outstanding debt of $18,000, that $6,000 in cancelled debt becomes taxable income, reported to you on a 1099-C.
How to Report
With limited exception, the amount in Box 2 of your Form 1099-C is the amount of taxable income that you must report when you file your taxes. Transfer the amount of the canceled debt to Line 21 of your Form 1040, "other income." Make a note on Line 21 explaining that this figure comes from Form 1099-C.
Bankruptcy and Insolvency
Bankruptcy and insolvency are the two main ways to avoid paying tax on 1099-C canceled debt. For bankruptcy cases, you shouldn't receive a 1099-C, but if a lender issues one, it should check the bankruptcy box on the form. This indicates to the IRS that your canceled debt should avoid taxation. If you did not file bankruptcy but were insolvent at the time the lender canceled your debt, you must attach Form 982 to your taxes.
Mortgage Forgiveness Debt Relief Act of 2007
For 2007-12, Congress provided relief for taxpayers in the form of the Mortgage Forgiveness Debt Relief Act. This law exempted taxpayers from income tax on up to $2 million of debt forgiven through the process of foreclosure or mortgage restructuring. For these years only, if you were the beneficiary of any debt cancellation related to your home mortgage, you would not even receive a 1099-C for this normally taxable debt.
John Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to writing thousands of articles for various online publications, he has published five educational books for young adults.