Form 1099C is an income information form that a lender will send both you and the Internal Revenue Service (IRS) if it cancels or forgives a debt that you owe. The taxation of Form 1099C income depends on a number of factors, including why the lender issued you the form and your financial state at the time of the triggering event. Common reasons for the issuance of a 1099C are home foreclosure and debt settlement.
Reporting a 1099C
If you receive a 1099C, you must report it on your Form 1040 when you file your taxes. According to the federal instructions for Form 1099C, you must report amounts on the form as "other income" on line 21 of Form 1040. You must also list the type and amount of income on this line. When you enter your 1099C amount on Form 1040, it will become a part of your total income, your adjustable gross income and ultimately your taxable income.
Taxation of 1099C Income
The IRS requires that you include 1099C income as "other income" because it considers forgiven debt to be ordinary income. Essentially, your lender paid you income because it issued you a loan that you did not ultimately repay. As you did not pay tax when you received this money, you must pay tax when your lender forgives the debt. The tax rate you will pay on your 1099C income will be the same as if you received the income as a wage or salary.
Bankruptcy and Form 1099C
Bankruptcy is a special circumstance when it comes to debt forgiveness. According to bankruptcy law, you do not have to include debts discharged in bankruptcy as income when you file your taxes. A lender such as a credit card company that you include in your bankruptcy should not issue you a 1099C, and if it does, the box marked "bankruptcy" should be checked to indicate that the amount is not taxable income. If you receive an erroneously issued 1099C, you can file Form 982 with your taxes to exclude the amount shown from your income.
If you are insolvent at the time a lender forgives your debt, you can eliminate some or all of your tax liability. Essentially, you are insolvent if your total debt exceeds your total assets. However, the IRS recommends that you hire a tax professional to help you determine if you qualify for the insolvency exception as it is difficult to determine the extent of insolvency for tax purposes.
- Internal Revenue Service: Home Foreclosure and Debt Cancellation
- Internal Revenue Service: Form 1099-C
- Internal Revenue Service: Instructions for Form 1040
- Moran Law: Tax FAQs
- Internal Revenue Service: Form 1040
- Internal Revenue Service: Form 982
- Internal Revenue Service. "About Form 1099-C." Accessed Jan. 17, 2020.
- Internal Revenue Service. "Canceled Debt - Is It Taxable or Not?" Accessed Jan. 17, 2020.
- Internal Revenue Service. "2020 Instructions for Forms 1099-A & 1099-C." Accessed Jan. 17, 2020.
- Internal Revenue Service. "2020 Form 1099-C." Accessed Jan. 17, 2019.
- Internal Revenue Service. Form 1099-C. Accessed Feb. 3 2020.
- Internal Revenue Service. "How to Prepare Your Tax Return for Mailing." Accessed Jan. 17, 2020.
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.