Bill's Answer:
Answered by
Mark Cappel
Under federal law, a financial entity is required to send a taxpayer a “Form 1099C Cancellation of Debt” whenever it forgives or cancels a loan balance greater than $600. This may create a tax liability for you because the canceled debt is considered “income” for tax purposes. The amount of debt forgiven must be reported on IRS Form 982 (PDF) and this form must be attached to the taxpayer’s tax return.
The financial entity, which may be a federal government agency, a financial institution (such as a bank), a credit union, or "any organization in which a significant part of its trade or business involves the lending of money" may issue a Form 1099C because Freedom Debt Relief negotiated a savings of more than $600 on a debt you had with a creditor.
You may have the ability to reduce or eliminate this so-called Cancellation of Debt Income (CODI) if you were insolvent immediately before the cancellation. For the purposes of completing Form 982, the IRS considers a taxpayer insolvent if the total of all of the person’s liabilities exceeded the fair-market value (FMV) of all of that person’s assets. To determine insolvency, assets include the value of everything the taxpayer owns (including assets that serve as collateral for debt and exempt assets which are beyond the reach of creditors under the law, such as interest in a pension plan and the value of a retirement account). Liabilities include:
- The entire amount of recourse debts, and
- The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt.
Here are two hypothetical examples the IRS uses to describe the cancellation of debt income concept:
Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a Form 1099C from his credit card lender showing canceled debt of $5,000. Greg’s total liabilities immediately before the cancellation were $15,000 and the FMV of his total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, Greg was insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets). Because the amount by which Greg was insolvent immediately before the cancellation exceeds the amount of his debt canceled, Greg can exclude the entire $5,000 canceled debt from income.
Assuming the same facts as above, let us say that Greg’s total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation were $7,000. In this example, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt exceeds the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.
More Information on Cancellation of Debt Income
The Internal Revenue Service document Publication 4681 contains more information on the tax consequences of canceled debt. It also contains specific instructions on how to complete Form 982.
If you receive a 1099C keep it with your other tax documents. Be certain to give the 1099C to your tax preparer, and give the tax preparer information regarding your total liabilities and the FMV of your assets as they were immediately before the cancellation.
Mortgage Forgiveness Debt Relief Act
I realize your cancellation of debt income question is not related to a mortgage, but I am mentioning the Mortgage Forgiveness Debt Relief Act in case you have heard about a federal program that forgives debts and are curious about it. The Mortgage Forgiveness Debt Relief Act provides tax relief for mortgage loans on primary residences forgiven in 2007 through 2012. See the IRS document “The Mortgage Forgiveness Debt Relief Act and Debt Cancellation” for more information. Again, this program does not help you with your debts settled with a debt negotiation, consolidation, or resolution program.
If your debts are causing you financial distress, access the Bills.com debt saving center to get no-cost quotes from pre-screened service providers.
I hope this information helps you Find. Learn & Save.
Best,
Bill
Tom W.
Williamsport, PA | January 28, 2013
Williamsport, PA | January 28, 2013
I just received two 1099-C forms from Bank of America for the same credit-card account, the first discharging some $3,900 in debt for which "borrower was personally liable" ... and a corrected form a day later, reducing that amount to zero and saying the borrower was NOT liable. Can I assume that I needn't claim this as income? And can the creditor still try to collect after discharge? Thank you very much for your consideration and assistance.
(0)
Bills.com
January 29, 2013
January 29, 2013
Without knowing more about your financial situation and the $3,900 debt, we won't venture a guess what the two 1099-Cs mean. Did you file for bankruptcy, which discharged the Bank of America debt? Is this a case of mistaken identity or identity theft? Did you reach a settlement agreement with BofA about the account?
Your best course of action is to take the 1099-Cs to a tax professional: certified tax preparer, CPA, enrolled agent, or tax lawyer. He or she will ask the questions mentioned here, plus many more about your financial and tax history.
Regarding your second issue, unfortunately, an original creditor is permitted to issue a 1099-C and continue to pursue the consumer to collect the debt. Alternatively, the original creditor is permitted to issue a 1099-C and sell the debt to a collection agent. If you later settle the debt, you may need to file an amended tax return.
Your best course of action is to take the 1099-Cs to a tax professional: certified tax preparer, CPA, enrolled agent, or tax lawyer. He or she will ask the questions mentioned here, plus many more about your financial and tax history.
Regarding your second issue, unfortunately, an original creditor is permitted to issue a 1099-C and continue to pursue the consumer to collect the debt. Alternatively, the original creditor is permitted to issue a 1099-C and sell the debt to a collection agent. If you later settle the debt, you may need to file an amended tax return.
(0)
Nei A.
Plantation, FL | April 10, 2012
Plantation, FL | April 10, 2012
Bill,
I received three 1099-C for year 2011, one for each of the last quarter of the year. My question is, since the date of cancellation are different: Do I have to file a form 982 for each one of them or can I combine them all in one?
(0)
Bills.com
April 11, 2012
April 11, 2012
I recommend that you have a tax professional review the documents and instruct you how to fill out the IRS tax form 982.
(0)
Robert M.
April 14, 2012
April 14, 2012
You have to figure the extent of your insolvency separately just prior to each of the cancellations (i.e. you have to fill in 3 worksheets). For the first debt cancellation, you still owed the other two, so these would be included in your liabilities for the first. For the second cancellation, only the third one can be included as a liability and for the third, none of them would be included. More than likely, your other assests didn't change much from the first to the third cancellation, so some entries may be the same on all 3 worksheets. One thing that would change is your cash on hand (e.g. checking and savings account balances). Also, any IRA's or 401K's you have would likely ave changed value. Just fill out 3 worksheets.
(0)
Lisa B.
Houma, LA | March 31, 2012
Houma, LA | March 31, 2012
Bill, can't seem to find the answer I'm looking for. I live in Louisiana. The consent judgment/community property settlement had my ex-husband responsible for certain credit card debts. He then was discharged through bankruptcy in August 1998, which he included the credit cards he was responsible for. One credit card company decided that since I was an authorized user, the account changed to an individual account under my name and discharged as bad debt. My credit report was flagged as consumer disputes charge. The account was sold twice, seen this on my credit report. Back in 2008, I reviewed all 3 credit agencies, the accounts were not listed on the credit reports. About 3 weeks ago I get a 1099-C from the last company that bought the debt, stating date canceled 12/15/11. Was I even legally responsible for this debt, after the community property settlement?
(0)
Bills.com
April 01, 2012
April 01, 2012
In general an authorized user is not responsible for the debt on the account. I recommend that you speak with a tax professional and show him the paperwork including the 1099-c and documents showing that you were an authorized user.
(0)
Judy G.
Tacoma, WA | March 26, 2012
Tacoma, WA | March 26, 2012
Occasionally I am able to get one of my credit card companies to reverse a late charge, or my bank to reverse an overdraft fee. Are these also considered taxable forgiven debts?
(0)
Bills.com
March 26, 2012
March 26, 2012
Interesting question. One can create a convincing argument either way. Have you been issued a 1099-A or 1099-C for these items? If not, do not let them concern you.
(0)
Berta W.
Amissville, VA | March 04, 2012
Amissville, VA | March 04, 2012
Hi Bill,
I had a COD and based on the insolvency worksheet in Pub.4681, I am insolvent for the full amount of debt canceled (100k of student loans). I have indicated this on Form 982 but it states that I also must reduce my Tax Attributes in Part II. Is it possible that I do not have any tax attributes? I do not own a business, or property. I earned a negligible amount of money, on which I owe no taxes, nor am owed a refund.
What is the Tax Attribute called "minimum tax credit"? Does that mean that my standardized deduction for next year is reduced by a portion of this year's COD?
If not, how do I note on Form 982 that I do not have any Tax Attributes?
Thank you!
(1)
Bills.com
March 07, 2012
March 07, 2012
You need to address your excellent and complex questions to a tax professional. I can't give tax advice, but will share some thoughts with you about the issues your questions raise.
The minimum tax credit tax attribute is a credit carryforward if you paid alternative minimum tax in a prior year. Generally, this credit arising from when taxpayers incur alternative minimum tax from items whose timing is different when computing the alternative minimum tax and regular taxes.
Most taxpayers have at least some personal-use property (tax attribute number 5 to be reduced). This includes cars, home furnishings, electronics, etc. Reduce the tax attributes (original cost basis of property) of this class of items by the COD amount. If, however, total liabilities after the COD exceed the basis in their personal-use property, no reduction is required according to IRC 1017(b)(2). So, for example, if you still have credit card debt and auto loans of $20,000 and your basis in all personal-use property is $15,000, no reduction of basis would be required. In this case, you would show the detail on the reduction of tax attributes statement – lisingt out personal-use property and each item’s cost basis, then detailing all remaining liabilities after the COD. If the total basis in personal-use property exceeds total liabilities, show the detail on the statement but reduce the basis in each item proportionally.
Again, please discuss this with a tax professional.
The minimum tax credit tax attribute is a credit carryforward if you paid alternative minimum tax in a prior year. Generally, this credit arising from when taxpayers incur alternative minimum tax from items whose timing is different when computing the alternative minimum tax and regular taxes.
Most taxpayers have at least some personal-use property (tax attribute number 5 to be reduced). This includes cars, home furnishings, electronics, etc. Reduce the tax attributes (original cost basis of property) of this class of items by the COD amount. If, however, total liabilities after the COD exceed the basis in their personal-use property, no reduction is required according to IRC 1017(b)(2). So, for example, if you still have credit card debt and auto loans of $20,000 and your basis in all personal-use property is $15,000, no reduction of basis would be required. In this case, you would show the detail on the reduction of tax attributes statement – lisingt out personal-use property and each item’s cost basis, then detailing all remaining liabilities after the COD. If the total basis in personal-use property exceeds total liabilities, show the detail on the statement but reduce the basis in each item proportionally.
Again, please discuss this with a tax professional.
(1)
Curious L.
San Antonio, TX | March 07, 2012
San Antonio, TX | March 07, 2012
Please notice that Bill indicated "basis" in assets for the reduction of tax attributes calculation. This is a different number than what you used to calculate your original insolvency. Basis is typically (but not always) cost. So instead of using the resale value of your car (FMV) now you would use how much it cost you to buy it originally. The reduction of tax attributes portion of this exclusion process is the most complicated, so please get professional assistance. If your facts are really as straight-forward as you mention then it shouldn't take you long to get an answer.
(1)
Berta W.
Amissville, VA | March 12, 2012
Amissville, VA | March 12, 2012
Dear Bill and Curious L.,
First of all, THANK YOU for your very informative answers. I've spent a great deal of time searching for information about IRS Form 982 and I've found lots of comments about 1099-C's, Form 982 in general, and even exclusionary cases (like insolvency) but with the exception of your excellent comments, I have found very little about reducing tax attributes as it pertains to Part II of Form 982. This includes advice I sought from an agent at a local (franchise-owned) tax preparation firm. Rest assured, I will be seeking the expertise of another tax professional.
That said, may I 'pick your brain' just once more?
The BASIS (thanks, Curious!) of my personal-use property (no more than 10k) is far below my liabilities AFTER my cancellation of debt (still owe another 60k in student loans). Based on this (as I understand it), no reduction of tax attributes is required in Part II of Form 982 (according to IRC 1017(b)(2)). How do I indicate this on my taxes? What exactly does a "statement" to the IRS with this sort of information look like? I did find a legal aid society that posted an example of a letter to the IRS that allows one to document specific monetary amounts to justify insolvency. Would it be appropriate to use a letter such as this and modify it to say that I am justifying why I have no reduction in tax attributes?
Again, thank you so much!
(0)
Curious L.
San Antonio, TX | March 12, 2012
San Antonio, TX | March 12, 2012
Again, please rely on a tax professional. Follow the instructions for the forms that you are completing. If they require that additional schedules be submitted, then do so. Whether or not they are required submissions is separate from whether or not you should retain them for your records in the event that you are audited. Let me know if you have any other questions. Hope everything works out for you.
(0)
T J.
March 01, 2012
March 01, 2012
Hi Bill, I read through the entire IRS booklet on Cancelled Debt and yet there was no example for my scenario. Quick detail: Spouse (before we were married but after already owned property together) guaranteed a bank loan obtained in his disregarded entity LLC's name. Bank liened only his house, but not the property that we jointly owned. Currently discussing settlement which will result in cancelled debt.
Question is how to calculate insolvency for spouse. For assets and mortgages that we jointly own does it mean spouse would list asset FMV @ 50% and mortgage amount @ 50%. For IRA accounts does anything in my name factor in, or only IRA's in spouse's name. We have filed taxes jointly since marriage....does filing for insolvency mean we will need to file married separately in the year of the cancellation of debt?
Any help would be much appreciated. We have tax accountants, one of which is a tax attorney, doing our taxes, but they cannot help us until they have the cancelled numbers. I just want to be able to see if insolvency is possible first. Thanks
(0)
Bills.com
March 02, 2012
March 02, 2012
I have to give you the same answer as your tax lawyer. The numbers will tell the tale.
(0)
Rich B.
Lyndhurst Twp, NJ | February 15, 2012
Lyndhurst Twp, NJ | February 15, 2012
Hey Bill,
Hope you can help me with this.
I am attempting to cancel a substantial portion of a note that an individual (not a financial institution) wrote to me and my partner in 2010 to purchase his business. The business failed and the note holder seems to be ok with some portion of the note being cancelled.
My partner and I were 60/40 in the capital structure (It was an LLC, but this particular note is personally guaranteed by both of us). Since the failure of the business, my parter declared bankruptcy.
I guess my question is if I can negotiate a debt cancellation with the note holder does my bankrupt partner split the tax liability in the same proportions as our ownership interest even though he has been protected by bankruptcy? Or more to the point would I be responsible for the entire cancellation of debt because I am the only surviving solvent partner.
Any help would be great
Rich
(0)
Bills.com
February 16, 2012
February 16, 2012
Rich, I can't offer you tax advice or legal advice about how the bankruptcy affected things. You really need to speak with a tax professional and perhaps a bankruptcy attorney to get answers to your very good questions.
That being said, it is my non-authoritative opinion that you will be viewed as solely responsible for the debt cancellation.
If you get a professional answer, please report back.
That being said, it is my non-authoritative opinion that you will be viewed as solely responsible for the debt cancellation.
If you get a professional answer, please report back.
(0)
Rich .
Lyndhurst Twp, NJ | February 17, 2012
Lyndhurst Twp, NJ | February 17, 2012
Hi Bill
First off, thank you for your prompt response to my inquiry. I spoke to a bankruptcy atty about the allocation of debt forgiveness for tax purposes and he told me that since the lender in my situation is and individual and not a bank or other financial institution that one can negotiate with the lender to reduce the amount owed to whatever can be arranged and then add a clause to the new reduced amount document that the lender will not file a 1099c with the feds thereby avoiding the tax liability. The lawyer said that this is done regularly when not dealing with a regulated entity such as a bank and is completely legal
(at least here in NJ). Hope this helps someone else in the same situation. Now ,at least, I can negotiate with my lender without the overhang.
Thanks again you were extremely helpful. Rich
(0)
Roddy H.
Mcdonald, TN | February 11, 2012
Mcdonald, TN | February 11, 2012
For COD, I recently resolved a private student loan that was over $600 and received a form 1099-C. When determining insolvency immediately before the debt was forgiven, can I count the resolved debt as part of my liabilities? If I can, can I use the entire amount, which is the amount charged off plus what I paid in the settlement? Also, thanks for the great article!
(0)
Bills.com
February 11, 2012
February 11, 2012
For the purposes of measuring insolvency, you use the full amount of all liabilities the moment before you signed a contract to settle the debt. Let me make up some facts for the purposes of illustrating my point: Let us say the balance on a debt was $12,000 and you settled it for $5,000. You use the $12,000 amount plus whatever other liabilities you have (credit card, medical bills, car loan) to tally the liabilities side of the equation. The fact that you settled the debt for $5,000 is irrelevant.
Out of curiosity, what was the balance of your student loan and how much did you settle it for?
Out of curiosity, what was the balance of your student loan and how much did you settle it for?
(0)
Roddy H.
Mcdonald, TN | February 12, 2012
Mcdonald, TN | February 12, 2012
I was in default on a $42,000 loan and the loan company settled the debt for $6,000. That left with $32,000 to claim as income. Settling was better than not paying, even if I do have to claim as income and pay the tax. I am working with a tax professional company right now and I am going to be able to show I am insolvent for $42,000, which means I will not have to show the charged off debt as income and pay the tax on $32,000. That swings me from owing to getting a return of a couple of thousand!
(0)
Bills.com
February 13, 2012
February 13, 2012
Glad to hear. It is important to work with a tax professional to receive sound advice.
(0)
Maricar T.
C/o Jersey City, NJ | February 17, 2012
C/o Jersey City, NJ | February 17, 2012
Hello Roddy was is it that easy to show Insolvency? We have a timesgare loan that is in the process of being forgiven and we afraid of the tax income on our tax return.
(0)
Curious L.
San Antonio, TX | March 05, 2012
San Antonio, TX | March 05, 2012
Did you have a reduction in tax attributes? Make sure you ask your tax professional about the full impact. Even though you may be insolvent, there could be a deferred impact. Showing insolvency is not always difficult, but taking the exclusion could reduce other tax items that you are trying to claim. Look at publication 4681 and form 982.
(0)
Roddy H.
Mcdonald, TN | March 07, 2012
Mcdonald, TN | March 07, 2012
Maricar, I used the insolvency worksheet provided on page 6 of pub form 4681. I pulled all my records for the time immediately before I canceled the debt. I used zillow for my house price, kelly blue book for my car values, checked my pension, checking account and 401k statements at the time before canceling. It was very hard to put all this together and put the values in the IRS worksheet. I then used a tax professional service and purchased the extra protection just in case i was selected to be audited by the irs. I let them do the forms. It cost me a little extra, but not very much when compared to what I would have had to pay. I had a little student loan payments to deduct, as well as two kids, a wife, mortgage interest, and second mortgage interest. It was not very difficult.
(0)
Tom G.
Amarillo, TX | March 15, 2012
Amarillo, TX | March 15, 2012
Bill, I need a bit of clarification. My daughter had a vehicle that was repo'd in 5/2008 and sold. They came after her for the balance of some $8000 and finally settled on $2300 in June 2010, 2 years later. So does she have to list the vehicle as an asset when completing the insolvency work sheet since she did not have the vehicle immediatley prior to to the time debt was forgiven?
(0)
LADY B T.
River Ridge, LA | February 10, 2012
River Ridge, LA | February 10, 2012
I Just got a letter from a payday loan place stating I had a debt of $498 with them from 2008 and per irs rules 4861 they forwarded me a 1099c form, and they added on $2040 of intrest on it! My questions are 1, how could they just be contacting me after 3 years, 2. per 4861 the amount they say I owe is under $600 so wouldn't this be crap? But in boxx #3 the intrest is high, so would that allow them to meet the $600 minimum to send me this form? And lastly, shouldn't this had been sent to me like 3 years ago?
(0)
Bills.com
February 11, 2012
February 11, 2012
Consult with a lawyer in your state who has tax experience. First, it is not clear to me a payday lender qualifies to issue a 1099-C. Second, the three-year delay may or may not be significant. Third, the inflated interest and other charges may not be legal according to your state's usury laws.
(0)
West W.
Beverly Hills, CA | February 03, 2012
Beverly Hills, CA | February 03, 2012
Hello. My spouse purchased a vehicle, prior to knowing each other. At some point thereafter, my spouse stopped making payments and immediately called the lein holder stating the financial inability to make futher payments. The lein holder made mutual arrangements to repo the vehicle which commenced shortly thereafter. This all occurred back in 2005 - again; prior to us knowing each other whatsoever.
Fast-forward to present Jan 2012. My spouse receives a 1099-C "Cancellation Of Debt" letter from the prior lein holder. It states that, in 2011, the lein was cancelled (unbeknownst to my spouse ~ first notice of this fact) and that the outstanding amount would be considered income and, as such, was reported to the IRS.
My question is rather simple: Since spouse is not employed, nor has been for many years due to raising a family, what obligation if any does my spouse have to this situation? Moreover, am I responsible in any way to pay income tax on a transaction (purchase and subsequent repo) that transpired well before we ever met?!
It would seem to me that, when one meets a potential spouse, you no longer should only ask how many people they've slept with; you should also request full details of their past unsettled finances.
(1)
Bills.com
February 04, 2012
February 04, 2012
First, your spouse will almost certainly need to file a tax return for the tax year indicated on the 1099.
Second, whether a person has liability for a spouse's pre-marital debt depends on your state's laws. You indicated you reside in California. See the Bills.com resource California Loan Defaults and its comments for a discussion of this issue.
Second, whether a person has liability for a spouse's pre-marital debt depends on your state's laws. You indicated you reside in California. See the Bills.com resource California Loan Defaults and its comments for a discussion of this issue.
(0)
West W.
Beverly Hills, CA | February 05, 2012
Beverly Hills, CA | February 05, 2012
Bill,
Thanks. The spouse's transaction occurred in Florida. We've since relocated.
Do you have any insight into that state?
Also, I spoke with a tax professional who suggested that insolvency rules may benefit my situation.
I don't have a clear understanding of how that works; would you kindly share your insight?
Thank you!
(0)
Bills.com
February 06, 2012
February 06, 2012
See the Bills.com resource Florida Collection Laws to learn about the rules in that state.
The best resource Bills.com offers on CODI is found on this page. Follow our links to IRS resources learn more about Cancellation of Debt Income, and which forms to use. Alternatively, consult with a lawyer who has tax experience.
The best resource Bills.com offers on CODI is found on this page. Follow our links to IRS resources learn more about Cancellation of Debt Income, and which forms to use. Alternatively, consult with a lawyer who has tax experience.
(0)
Loading more commentsSubmit a Comment
Since you don't have facebook, please provide us with your location and a valid email address so we can answer it. Without a valid email address,we can't reply. (Go back to login with Facebook)
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
We get a lot of comments! Before commenting, we ask you to do 2 things:
Log in
(If you don't have facebook click here)
Like us
Submit your comment!
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
Thank you for your comment. Your comment will be posted shortly.
Thanks for your feedback!
Comments (90)