Form 1099-C—Cancellation of Debt is the tax form that reports canceled debt which is taxable in most cases. This includes the debt that has been canceled, discharged, or forgiven.
The IRS sees pretty much any debt that has been lifted off of your shoulders as taxable income. This amount will be added to your gross income at the time of filing a federal income tax return.
In a typical form, the financial institution that canceled your debt will provide information about the following.
- Date of the event
- Amount of debt canceled
- Interest if included in the Box 2
- Description of the debt
- Information about whether or not the debtor was personally liable for the payment of the debt
- Identifiable event code
- Fair market value of the property
As you can see, Form 1099-C won’t state if your canceled debt is taxable or not. You can discuss this with the IRS but generally, most canceled debt is taxable, including student loans. If your repayment plan cancels your debt after a certain period of time, you will pay taxes on the amount forgiven.
How to use Form 1099-C in my federal income tax return?
Add the amount shown on Box 2 of 1099-C to your gross income. If filing a paper tax return, make sure to attach it to your 1040. The amount on Box 2 refers to the total amount of debt discharged. Therefore, no need to add the Box 3 in your gross income as it’s already included.
Can the lender collect money after furnishing me with 1099-C?
No. If the creditor still collects money from you even after issuing the 1099-C, there is a mistake. You should first contact the financial institution that issued your 1099-C and request the collected funds to be refunded to you.
Will canceled debt hurt my credit score?
It depends on the reason for canceled debt. If the debt was canceled due to the debtor being unable to pay it, this will hurt the credit score. If the debt was canceled due to forgiveness or it was discharged not because the debtor can’t pay but it exceeds the maximum time period to repay (e.g. student loans), it won’t have a negative impact on the credit score.
Do I have to pay the canceled debt?
The short answer to this is no. Otherwise, it wouldn’t be canceled debt but it would be freezing the debt. As soon as you receive a 1099-C, the debt amount shown on it is canceled and you won’t pay it back, but will pay taxes.