Explanation of IRS Form 1099C
Financial institutions use IRS Form 1099-C to report debts that they have canceled, written off or forgiven. It's the institution's way of documenting for the IRS the financial loss it has suffered from the unpaid debt, which it will claim as a deduction on its own taxes. The IRS also considers forgiven debt to be taxable income for the debtor, and Form 1099-C tells how much the debtor is on the hook for.
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Taxation
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When you take out a loan, the IRS doesn't consider the money you receive to be income because you'll be giving it all back when you repay the loan. You don't realize any net gain from the transaction. By paying interest, you incur a loss, so there's no income to tax. But when a lender forgives all or part of a debt, that means you've received money and won't be giving it back. That's income, and it's usually taxable.
Requirements
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A financial institution must issue a 1099-C every time it writes off a debt greater than $600. It must send a copy of the form to the debtor and the IRS. Even if the debtor doesn't receive a copy, however, the tax obligation remains.
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Exceptions
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Not all forgiven debt is taxable. Among major exceptions: debt discharged through Chapter 11 bankruptcy; debt that would have been tax-deductible had it been repaid; debt written off after the debtor has been declared insolvent; and student loan debt that's forgiven because the borrower met conditions that were part of the original loan, such as working for a particular employer. Some mortgage debts written off between 2007 and 2012 also aren't taxed. Taxpayers who receive a 1099-C should consult with a tax professional to determine whether the amount in question is taxable.
Elements
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Form 1099-C bears the names, addresses and taxpayer identification numbers of the creditor and the debtor. Box 1 gives the date on which the debt was canceled, and Box 2 gives the total amount canceled. If the canceled debt included interest on the original loan principal, the interest is shown in Box 3. Box 4 has a brief description of the debt. Box 5 will be checked if the debtor was personally liable for the debt, and Box 6 will be checked if the debt was discharged in bankruptcy. If the canceled debt came from a foreclosed property, the market value of the property is listed in Box 7.
Consideration
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Form 1099-C applies only to debts canceled by financial institutions and, in some cases, government agencies. Individuals are not required to file the form when they forgive loans they made to other individuals. In such cases, the debt is simply considered a gift to the debtor. Gift taxes may apply, but the "giver" is responsible for gift taxes, not the recipient. In theory, financial institutions could also classify write-offs as gifts, but as legal information company Nolo says, this would be unusual.
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References
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