Growing Without Rain

News and Views about Taxes

“What do I do with a 1099-C?”

with 2 comments

If you have had a debt forgiven – not an uncommon occurrence in this economy – you might receive Form 1099-C, Cancellation of Debt, in the mail. What that means is simple – the lender has reported the cancellation of your debt to the IRS, and the IRS will be expecting you to report that as income on your tax return, and pay the appropriate amount of tax on it. I’m sure that you don’t appreciate having “income” that you never saw in your pocket subject to tax, but that’s what the tax code allows.

Robert Wood’s excellent article in Forbes discusses ways that you might be able to handle the Cancellation of Debt (COD) income on your tax return (hat tip to Kathleen A. Scanlon for the tweet). Generally, you have to report the income on line 21 of your Form 1040 as other income subject to tax, but there are exceptions, which Mr. Wood covers in detail. I’ll mention a couple of the more common ones here.

If the COD is the result of a foreclosure or restructuring of the mortgage on your primary residence, or a “short sale” where the lender accepts less than the amount remaining on your mortgage and writes off the balance, that income is tax-free up to $2 million, for transactions from 2007 through 2012. Note that this applies only to your primary residence, and only for loans used to buy, build, or improve your home; if you took out a second mortgage to pay your kids’ tuition, you’re out of luck here.

If your liabilities exceed your assets by more than the amount of the debt forgiven, then you are considered to be insolvent, and the amount received from the COD can also be excluded from your income. Debts discharged in bankruptcy are also not considered to be taxable income.

If you are unfortunate enough to receive a 1099-C, you should not, must not, CAN NOT ignore it! I also recommend that you consult a reputable tax professional for advice – do NOT try to handle this on your own, because it’s all too easy to make a mistake that will cost you even more than getting out of the debt did in the first place. There are a lot of things that you can handle on your own when it comes to your taxes (yes, I know that’s sacrilege coming from a tax pro!), but COD isn’t one of them.


Written by nctaxpro

February 20, 2010 at 8:18 pm

Posted in Federal, Taxes

2 Responses

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  1. Hey very nice blog!! Man .. Beautiful .. Amazing .. I will bookmark your blog and take the feeds also

    Jack H. McDonald

    February 25, 2010 at 11:11 am

  2. Just a quick message 2 thank you 4 your interesting webpage. Do u know where I could find more on this? Thank you. Tracy x

    kitchener mortgage

    March 5, 2010 at 12:10 pm

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