Cancellation of debt

August 2, 2009 · Filed Under Cancellation of debt, Debt · Comment 

If you got a debt settled with your creditor and no further obligations to pay back the remaining balance waived off, you have to report it as a tax loss to the IRS using a 1099-C.

IRS will treat the cancelled debt as your income and will need you to file taxes on this even though you have not received the money. 1099-C form lets you know that the creditor is going to write off a certain balance. Your creditor will fill the 1099-C form and show the cancelled amount. This form has to be filled only if the cancelled amount is more than $600. You will receive a copy of the form by Jan 31 and the IRS will receive the form by Feb 28 of the tax year in which the debt was discharged.

Once you have got the form from the creditor, report the amount of the canceled debt as an income to the IRS and you will pay taxes on it. IRS exempts the following situation when the cancelled debt does not need to be shown as an income

When you have filed for bankruptcy and the debt was discharged.

Your total debts exceeds your total assets at the time when your debts were settled or deemed non collectible.

Indebtedness is due to a qualified farm expense or due to loss on real property business.

When the debt discharged is treated as a gift. However, these situations can be extremely rare.

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