Creditors record canceled debts on a form 1099-C, which is then sent to the debtor and the IRS. Most people are in for a surprise when they receive a 1099-C, not knowing that the canceled debt on this form must often be included as income on their tax return resulting in a big tax bill. Some common triggers for receiving a 1099-C include forgiven loan balances (like a canceled credit card debt), a home foreclosure or short sale (which results in the sale of a home at a price below your mortgage amount), or if you simply haven’t paid a debt in the last three years and the lender hasn’t tried to collect in the past year.
While most canceled debts are taxable, a lender is only required to send you a 1099-C if it forgives more than $600 in debt in a single tax year.
Which Forgiven Debt is Not Taxable
The following forgiven debt is not reported as income:
- Debt discharged in bankruptcy.
- Under certain circumstances where a borrower is deemed to be insolvent, some or all of your debt may not be reportable as income.
- Some student loan debt may not be considered income when forgiven.
- Since the financial crisis, forgiven mortgage debt on a borrower’s principal residence can be excluded income
Unfortunately, the exclusion for has recently been approved for only one year at a time — it was extended to the 2014 tax year by a December 2013 vote by Congress — and whether it will extend into 2015 remains a question mark. Two pieces of legislation — H.R. 1002 and S. 608 — are currently circulating in Congress, leaving the mortgage exclusion up in the air for tax years 2015 and beyond. If history is any guide, Congress will save this decision for a year-end vote, making it an important piece of legislation to watch if you expect to have canceled mortgage debt in 2015.
What a 1099-C means — and what it doesn’t
The fact you received a form 1099-C does not necessarily mean that you are no longer on the hook to pay your debt. Creditors have to consider a debt forgiven if you haven’t paid in three years and they haven’t made meaningful attempts to collect in the last year (Code H). It’s quite possible to receive a 1099-C only to receive notices for collection immediately after. It may be in your best interest to speak to your creditors to see if your debt has actually been canceled.