1099 c Cancellation of Debt Video #4
Something That Can Happen Everytime A Debt Is Negotiated
Hi. I am Nevada Licensed Debt Adjuster Damian Falcone. In this video we will discuss something that can happen every time a debt is negotiated. This is commonly referred to as 1099 c cancellation of debt, tax on a forgiven debt or Discharge of Indebtedness.
The IRS views money received as “income”. In the situation where the money received is from a bank for a home loan or in the form of credit card purchases the taxable effect of the “income” is cancelled when you re-pay the loan or credit card. If you never repay the loan or credit card in their entirety the IRS views the amount you didn’t repay as income and taxes it accordingly.
The process normally goes something like this:
Debt Settlement occurs, a debt is forgiven and a Discharge of Indebtedness occurs.
The lender is required to report to the irs a form 1099 c cancellation of debt and to the borrower –
The Lender should not and need not report forgiven past due interest and fees as discharge of indebtedness income, but some lenders do. In the event the lender does include amounts other than principal you should attach a statement to the tax return explaining the difference between the 1099 c cancellation of debt supplied by the lender and the correct calculation – the lender may also incorrectly report the Entire debt as forgiven.
In many cases, taxpayers may exclude the discharge of indebtedness income from their taxable income. These are 4 situations where you would be exempt from the tax
- The Insolvency Exclusion – The Insolvency Exclusion applies when the homeowner’s liabilities exceeded assets at the time the debt is forgiven. Lower income homeowners and those with high-debt loads are likely to be insolvent at the time indebtedness is forgiven. For Example: If you have assets valued at $100,000 and liabilities of $200,000 you are insolvent in the amount of $100,000 and would not have to pay tax on the first $100,000 forgiven –. This is typically the situation with a Loan Modification.
- Forgiven Interest and Fees – Interest and Fees are not income and consequently are not taxable
- Bankruptcy Exclusion – In the event you file for Bankruptcy protection you should check with your attorney but it is very likely this will prevent you from having to pay this tax
- Purchase Fraud/Disputed Debt Exclusion – In the event a purchase is deemed fraudulent or a debt is disputed as valid You can be exempt from paying this tax.
If you qualify under 1 of these 4 exemptions You should file form 982 with form 1040 and attach a detailed explanation of why the income is excluded. Normally the IRS will audit people who they receive a 1099 c cancellation of debt form for without receiving anything from the borrower - So be sure to file a form 982 with your 1040.
So in Summation: Everyone who negotiates a debt or has any portion of a debt forgiven should receive a 1099 c cancellation of debt form. It is possible to avoid the tax associated with a forgiven debt by qualifying for 1 or more of the 4 exemptions listed above. If you think you qualify you should include form 982 with a detailed explanation with your 1040 form to the IRS.