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Form 1099-C: This represents debt owed by the taxpayer that is written off by the lender as noncollectable. Form 982 is used on the tax return to determine any exclusion from income and any non-excluded income is reported on Line 21 of Form 1040 as "Canceled Debt"
The following exceptions MAY apply:
Bankruptcy
To the extent insolvent (liabilities exceed assets)*
Certain Farm debts
Non-recourse loans (box 5 of 1099C not checked)
Qualified personal residence debt**
Qualified real property business debt
*When you receive a 1099C that is not personal residence debt or from bankruptcy, the most important thing to do is establish the extent of your insolvency. Using the date on the 1099C, determine how much you owe and how much you own. Include the debt amount from the 1099C.
What you own includes the FMV of your home and cars (use kbb.com for cars) as well as all money you have in bank accounts and investments along with the value of anything else you own.
What you owe includes the canceled debt, credit card bills, car loans, home loans, student loans and anything else you owe to anyone.
If what you owe is more than what you own, the difference can be subtracted from the canceled debt before including it as income. If it is larger than the canceled debt, none is included as income. Use Form 982 to record this.
Be careful! If the numbers are close, you need to get accurate information as to the value of your assets. Appraisals are the best, but website and realtor comps may be accepted.
Obviously, if the numbers are dramatic ($100000 upside down on your house with no other significant assets and $5000 canceled debt) you don't need to be quite as psycho in record keeping. Still, take the time to get the best possible numbers NOW, while the records are easy to get, so you don't have to backtrack later.
**It has to be your personal residence at the time of foreclosure. There is some debate on this as to whether you need to be living in the home the day of foreclosure, but most take the reasonable position that if you leave the home due to imminence of foreclosure, you can exclude it as personal residence. The 2 out of 5 year rule for excluding gain does not apply here, though the code can make you think it does. The definition of "personal residence" from that part of the code applies, not the time rules. This provision expired January 1st, 2017.
http://www.irs.gov/pub/irs-pdf/i1099ac.pdf
http://www.irs.gov/taxtopics/tc431.html
I've started to see IRS letters questioning the absence of Cancelled Debt income on a tax return despite a properly electronically filed Form 982 clearly indicating that the cancelled debt is not income. This is most likely due to IRS computer matching systems trying to match Line 21 income with 1099C's it receives. The easiest solution to this is to include the full amount from the 1099C on Line 21 as cancelled debt, and then put a negative amount on Line 21 equal to the amount of debt excluded using Form 982 and labeling it as "Excluded Cancelled Debt Form 982" (or something like it.)
ReplyDeleteHi,
ReplyDeleteBefore I ask you my questions. I would like to let you know a little bit of what is going on. I am independent married taxpayer. Because my husband does not support me financially, I borrowed money from two banks for my schooling fees in 2010. Total debts from two banks are $12,000. I did not mention about the debts that I owed to my friends. From 2010 to 2013, sometimes I got job and sometimes I lost. Last year, I had 5-month contract job. Whenever I got a job, I tried my best to pay the debts down to two banks to $5,600 for both. You can divide the amount in half. When I lost my job, my mom in the other country sends a little bit of money for me to pay them. At least I pay them based on what I have. However, last years, I never received any letters from two banks about 1099-C form. Now, this year, they said I am going to receive 1099-C - cancellation debt
So, I have no house. I have no car. Nothing. I am unemployed but I did not declare unemployment yet. I paid them down in cash to the current amount
In 2013, my 5-month salary was $25,000.
My current balance on my checking is about $80.
But credit card: 2900 (not including interest or fee yet)
and citi is 2250
And I just found out that my mom will give me $2,250 to pay off citi.
Here my questions:
1/ Should I tell citi not to send me 1099C because I will pay them off shortly?
2/ If yes, how much I will pay back to the IRS based on my above info?
Thanks so much for your time and I look forward to hearing from you soon.
1. If they say you're getting a 1099C, it's probably too late to pay them, so I would save the money just in case the 1099C is taxable.
ReplyDelete2. The tax rate is whatever your income is taxed at. I would guess 15% based on the info provided.
When you get the 1099C, follow the instructions in the below post to see if you can get out of paying taxes on the 1099C. You may not get the 1099C before filing taxes, but I wouldn't wait past March to file. You can always amend. Banks suck at getting the 1099 to you. Here's the post:
http://supertaxgenius.blogspot.com/2012/10/cancelled-debt-and-insolvency.html
I got Loan Mod on my home due to being underwater and got sent a 1099C for $70,000.00. this is my primary residence. How do I handle this?
ReplyDeleteIf it's your personal residence than you simply file form 982 indicating it's your personal residence. Different software handles it differently, but, generally you put the 1099C into the software and it will ask you questions that will establish that it was your personal residence. This will make it tax free. If it doesn't, then you answered something wrong.
ReplyDeleteOne thing to note, there is an effect on your basis in the house, which generally will never matter, but, you should note for the future that your basis in the house is what you paid for it, plus improvements and MINUS the $70,000 cancelled debt. There are other factors but they almost never occur. This number (the Basis) will only be important if you convert the home to rental, run a business out of the home, or sell the home for a BIG profit. Still, it's a number you should be able to figure out if needed (most people don't) and the $70000 is a BIG change to it.
Here's my situation...student loans in my husband's name....he is now disabled and the loan has been forgiven, but we will still be taxed, so currently working on insolvency worksheet. Should the calculations be for his name only? And do we include the forgiven debt? We don't have credit card debt, own our cars, have 2 mortgages. So I know even before starting worksheet, we owe more just in mortgages than what we own.
ReplyDeleteUse only your husband's information.
ReplyDeleteInclude the student loan debt
Items held in both of your names include half of the debt and half of the value.
If half the mortgages, credit cards and cars leaves you >$5000 in debt, you can be a little casual valuing the rest of the assets.
If it's close, get really good values, and take pictures or have other evidence of what you own.
The idea is that the student loans already make you insolvent enough to cover themselves, so, if you're even $1 insolvent with the rest of your life - they're tax free when cancelled.
If it's not even close, your job is easy.
If it's close, you need to be prepared to back everything up.
Make sure to print all the web pages used to value your cars
Make sure to print or copy the credit card and mortgage statements.
Good luck, and consider making your next Amazon purchase through the search box in the upper left.
We got a 1099-c from my wifes mortgage lender for a loan modification that did not reduce the amount she owes. They claim they need to file it as its part of a loan modification and their fallback is that the IRS will dismiss it as our primary residence. The problem is that it creates a $3000 tax bill in MN which is where we live. Can we contest the 1099-c as we did not actually have any dept canceled?
ReplyDeleteYou can attempt to contest the 1099C, and their point is not proper that it makes no difference. Excluding it due to primary residence exclusion reduces your basis in your residence which has implications in the future. There might be an argument in their favor that the reduction in interest rate results in a cancellation of debt but I don't think so. Let me do some more research and get back to you.
ReplyDeleteGood news for you! Minnesota JUST passed a tax relief bill that applies retroactively to 2013 that allows you to exclude personal residence debt cancellation from income. Make sure your tax preparer or software has the latest updates and you should avoid paying taxes on it. I would still pursue a corrected 1099C, but at least you can file now without paying any taxes on the cancelled debt.
ReplyDeletePlease consider a tip or Amazon purchase since I just saved you $3000 :)
ReplyDeleteMy husband owned a home with his former wife from 1992 to 2006. In 2006 he re-financed to "buy" out her interest in the home. They were divorced in 2002. In 2008 he fell into difficult financial times and was unable to continue making payments on the home. Shortly, after we moved into my home which I own in my name only. In 2011, he tried to do a short-sale. We had approval from BOA & upon pulling the title for the closing date it was discovered that there was multiple missing assignments of mortgage and we could not close. We tried a deed in lieu with no luck wither. I have worked diligently to get the title cleared. We paid a lawyer and contacted the title insurance for the lender. Finally, we have a clear title and the foreclosure process has begun (6 years after his last payment). Unfortunately, the amount of time that passed working on this title issue is too long to still call the 1099-C property his primary home. I have contacted the lender and we are hoping to now do a short-sale. I know this will cause a 1099-C to be printed. I am under the understanding that we will be able to deduct the "accrued" interest because that is a normally deductable item. He is insolvent - his debts outweigh his assets. I am not insolvent. My assets exceed my debt (due to both my parents dying quickly). We file married filing joint. The 1099-C will be in his name only & I never lived in the home. When we file and include the 1099-C-does the 982 insolvency form need to include my assets held only in my name. Our only joint asset is a motorcycle. He has a vehicle. I am losing sleep over this. I know we have the option to file married filing separate, but I am the person who earns more and that will negatively impact me. Basic question? If we file Married Filing Joint and he has a 1099-C in his name only do my individual assets need to be included for the insolvency test? I know our joint asset - the motorcycle -will be 50/50. We live in Massachusetts which I do not believe is a community property state thankfully! I have read the IRS booklet on the topic & they only seem to have examples of joint debt. Where in the tax code can I find this answer?
ReplyDeleteI think you have answered your question perfectly. Only his assets will be included and joint assets are split 50 50. I have an insolvency pay on this subject you should read. I would link but I'm on my phone. Just Google super tax genius insolvency and it will come up. Hope this helps.
DeleteDo you include 401k loans as liabilities when calculating insolvency?
ReplyDeleteThe value of the 401k is an asset. The loan should be a liability - though the IRS might argue about that.
Deletewhat does it mean if box 5 was not checked in my 1099-C and I live in state of NJ
ReplyDeleteYou should talk with a New Jersey tax professional on that one.
Deletewhen filing out my taxes its asking if debtor is personally liable for repayment of the debt.
ReplyDeleteAnswer yes if box 5 was checked and no if not.
DeleteI've been on here for the last couple of hours and have immensely enjoyed your blog! I am several years behind in filing my taxes and am slowly catching up (the IRS knows this!). I'm now up to 2013 and in going through my 2013 box, I came across the dreaded 1099C for cancellation of my student loan debt due to being disabled -- Yay and Nay! I was really (I mean REALLY) dismayed to read that you have to include your retirement as an asset when figuring your insolvency and I have to say it didn't make much sense to me, since "regular" folks don't have to include their paychecks. Anyway -- I've been digging and digging and pulled up the 2013 forms including the 4982 instructions. Now, it may be for ONLY 2013, but it seems to clearly indicate to me that this does NOT have to be included! (Publication 4681, 2013 Instructions, Page 5, top of 3rd column under "Insolvency" section). It states:
ReplyDelete"For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt AND EXEMPT ASSETS WHICH ARE BEYOND THE REACH OF YOUR CREDITORS UNDER THE LAW, SUCH AS YOUR INTEREST IN A PENSION PLAN AND THE VALUE OF YOUR RETIREMENT ACCOUNT)." I haven't checked instructions for subsequent years and maybe it has changed, but what do you think???? Granted -- the punctuation is horrible and the sentence structure makes it confusing, but it says what it says. Please don't burst my bubble, though, as I sure don't want to include my retirement! Thanks so much!
With virtual certainty, I can say that the value of assets in your retirement accounts are an asset. The annuitized value of your annual non-disability retirement payments are also an asset. Disability payments such as Social security Disability or VA disability might be an asset. I have seen arguments either way and have not seen anything specifically litigated. You have to make your own call on those with regard to your risk tolerance.
DeleteThanks so much for your quick response. My retirement is not a disability retirement, but a federal one. I'm still not getting why you say it's an asset when the instructions clearly say not to include it and it is exempt. I'll take your expert word for it and decide what to do when I'm filing this week. Thanks again!
DeleteI had to file BRpcy and helped in doing a short sale for the lender. FMV was less than what the property sold for. Not sure why the 1099 did not reflect that value. Any way my question is do I still report the amount shown on the 1099c on line 21? Thanks
ReplyDeleteIf you did a short sale the amount of cancelled debt should reflect the debt AFTER the sale of the property. Lenders SUCK at this! Get the lender to issue a corrected 1099c reflecting the proper amount of debt cancelled if wrong.
DeleteThere is a bankruptcy exclusion for cancelled debt. Fill out Form 982 using the instructions to make sure yours qualifies. If it does, you exclude the debt using form 982 and don't include it on line 21. Also, if it was your primary residence at the time of foreclosure, that is an exclusion too.
Hi There,
ReplyDeleteIn the comments to your other post on insolvency, you suggest in the comments that pensions which are not yet vested or which you are not yet collecting only count as assets to the extent of your own contribution.
In a comment earlier in this post, you suggest instead that the full value of the pension should be considered an asset.
In my case, my pension had not vested before the taxable event, and I am not eligible to collect for 25-30 years. Am I likely to be ineligible for insolvency as a result? If so, should I file a 1040x and file separately, since the 1099c is in my wife's name only, and she does not have a pension in her name?
I appreciate any consideration you give to my question and I understand if it is beyond the scope of the blog.
-Pete
First thing...unless you live in a community property state, you calculate insolvency separately. You don't have to file Married Filing Separately.
DeleteAs far as Pensions, here's a good summary:
1. If you are receiving a periodic, non disability check, you need to include the amount of money you would have to annuitize to produce that payment (obviously if it is an annuity or a payment based on an invested lump sum - the lump sum amount is what you include.)
2. If you have a fully vested pension, you include the amount in the account even if you can't access it at your age or in a lump sum.
3. Include all vested amounts in 401k or other similar accounts.
4. If you have a pension that is not fully vested, such that you don't get anything if you were fired or quit, you don't include it.
That covers most things, with the understanding that there is some squishiness and interpretation to a lot of this.
In reading the insolvency form. The debt and any assets are only relevant before the date the debt is forgiven. Is this good information? Thank You
ReplyDeleteYes.
DeleteThe date just prior.
The debt on the 1099C is a liability and any FMV from the 1099C because you lost property is an asset.
I have an insolvency post for this. You can find it in the Master Index.
Hello!
ReplyDeleteI received a 1099C for a rental property that was taken by the lender in a foreclosure. The date on the 1099C is 01/27/2016 box2 $82,996.69 box3 24,166.87 box7 $0.00. I am trying to complete the insolvency worksheet but I'm not sure if I can use $0 as the FMV of the property as they did on the 1099C. Per Zillow, the property was foreclosed to the lender on 5/8/15 for $1246.00 and sold by the lender on 1/29/2016 for $32,500.00. The amount I use as FMV will determine whether I am completely insolvent or if I have to include some of the $82,996.69 in my income.
Any advice you have would be greatly appreciated. Thanks!
Use the 32500. Nothings more fmv than a sale.
DeleteThis comment has been removed by a blog administrator.
ReplyDeleteHello, we file jointly, I am a nonworking spouse that received a 1099c. I was insolvent according to the rules I read in the publication, but when I do the interviews in our H&R Tax software, it only puts the 1099c in the working spouse's name. Do you know if this problem has occurred before and was it resolved
ReplyDeleteI don't work with HRB home software
DeleteReceived a 1099C for a mortgage. line 1 is $130K the FMV line 7is $95K, but I owed $250K on the house. Should I add the $95K to my asset and the $250K to my liability? not sure how to handle this portion.
ReplyDeleteExactly
Delete