Receiving a 1099-C form for cancellation of debt can be a stressful experience. However, it’s important to understand how to deal with it to avoid any negative consequences.
Here are the steps you can take to deal with a 1099-C cancellation of debt:
- Review the form: Make sure that the information on the 1099-C form is correct. Check the amount of canceled debt, the tax year, and your personal information. If you find any errors, contact the lender or creditor who issued the form to have it corrected.
- Determine whether the canceled debt is taxable: Not all canceled debt is taxable. For example, if the cancellation of debt was due to bankruptcy or insolvency, it may not be taxable. You may want to consult a tax professional to help you determine whether the canceled debt is taxable or not.
- Report the canceled debt on your tax return: If the canceled debt is taxable, you must report it on your tax return. You will need to include the amount of canceled debt as income on your tax return, and you may be required to pay taxes on it.
- File Form 982: If you can demonstrate that you were insolvent at the time the debt was canceled, you may be able to exclude the canceled debt from your taxable income. To do so, you’ll need to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
- Keep copies of all relevant documents: Make sure to keep a copy of the 1099-C form, as well as any other documents related to the canceled debt, such as bankruptcy papers or debt settlement agreements.
Dealing with a 1099-C form can be complicated, so it may be helpful to consult with a tax professional who can guide you through the process.