The Only Tax Document You Need to Know

September 19th, 2008, Author: User Image

What is a 1099-C (Cancellation of Debt)?

If your debt has been written off by a creditor then you may receive a 1099-C from the source (i.e Chase Bank, Bank of America or Discover). You must report this amount as personal income on your taxes because you never paid it back - thus it is considered income.
However, if you “settle” this debt as “paid in full” with the creditor make sure you ask that they agree to the settled in full arrangement and that they are not sending the remainder as a loss to the IRS. If the creditor willingly accepts “less than” as “full payment” then make sure they agree not to report the remainder. The creditor can refuse but usually does not.

What amount do I need to qualify?

If a federal government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more you should receive if 1099-C from them.
Discounted mortgage. If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is a canceled debt. You must include the canceled amount in your income.
Stockholder debt. If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is considered dividend income to you.
If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. This is because the canceled debt is considered a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.

This sounds complicated, just give me the Cliff Notes, Rick.

Simply, if your are getting out of debt by settling accounts this is a must learn. There are no short cuts; you should know this rule inside and out.
I know you’re thinking you will lose all your savings from the settlement to taxes, which is an unfortunate reality. However, remember you will be paying at your taxable income rate.

The Truth of Credit