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1099s Taxes

1099-C What Is It and Is Taxable

So, you’ve had a large debt of some sort. And you’ve been worrying about this obligation for quite some time. However, you get notification that either your offer to settle has been accepted or your creditor forgives the debt entirely. This is great, but later in the year you receive a strange 1099 form that is called a 1099-C. You know that 1099s have information that may or may not be taxable. This prompts the question of “What is a 1099-C and is it taxable?”

What is a 1099-C?

Well as you can read on the form itself 1099-C is for the cancellation of debt. Specifically, a 1099-C is typically issued when a debt is cancelled. Per the IRS debt is defined as any amount owed to you, including stated principal, stated interest, fees, penalties, administrative costs, and fines. This can include partial cancellation along with cancelation of entire debt accounts. A common example of this, is home loan foreclosure or any debts that were “written off” in bankruptcy. 1099-C must be issued to the debtor of the debt forgiven if that debt is more than $600. Some examples of organizations that have to issue 1099-Cs are financial institutions, credit unions, government agencies, and organizations whose significant trade or business is the lending of money. This would include companies such as credit card companies and finance companies.

Key Boxes

This form is quite self-explanatory and easy to follow. Like all 1099 forms the entire left side is dedicated to the personal information of both parties. This includes the addresses of the financial institutions and of the debtor. Moving to the right side of the sheet, box 1 is the actual date of the identifiable event. In short, an identifiable event is essentially the date that the debt was either forgiven or the debtor was considered “released” from having to pay the debt.

Box 2 is without a doubt the most important field in the entire form. This is the amount of the debt that is forgiven, this amount from the identifiable event must be reported on 1040 as other income. The next box is box 3 which lists any interest that was accrued/forgiven in box 2. Box 4 is a description of the debt that is forgiven. If anything, this field is more for your benefit (and the IRS’s as well), so you can remember specifically what the debt was for.

After that box 5 is a checkbox that is checked if the debtor was personally liable for repayment of the debt. Then box 6 is the identifiable event code. This code is mostly informational code that is used to report the nature of the debt that is being canceled. These codes can range from bankruptcy to a policy update by the debt holder to not collect and many other reasons in between. The final box is box 7 which is the listing of the fair market value of the property. This field just lists the value of the property if the debt was attached to a property, and it is mostly used if the issue is combining Forms 1099-A and 1099-C into one form.

So, Is 1099-C taxable?

The short answer is yes, the amount in box 2 is taxable in most situations (not all though). This may seem a bit counter intuitive because it’s not like you received a bag of cash. However, from the Internal Revenue Service’s view point it’s like you received cash. This “cash” being the money from the debt that you originally received. Effectively this amount that was the debt (or portion of the debt) is being treated as income by the IRS.

This income is reported on Schedule 1, on line 8c, which will then be totaled to the “other income” line. This will in turn be totaled onto line 10 of Schedule 1. This totaled amount goes onto Form 1040 under other income which is located on line 8. This other income will then be worked into your taxes like it normally would in most cases and be taxed at your ordinary tax rates, again in most cases, there are exceptions to everything.

Conclusion

In summary the 1099-C is a self-explanatory form. The title is the cancellation of debt and that is exactly what is for. This form used to be a lot more common during the aftermath of the Great Recession but obviously the form is still somewhat common today. The amount in box 2 is taxable in most cases and will end up on your 1040 and be taxed as ordinary income in most cases. However, it’s important to review your own tax situation and contact your CPA/accountant. Your CPA/accountant will be able to explain your own unique tax situation in greater detail and will be able to advise you on how to report the form and how to optimize your taxes.