Receiving a 1099-C does impact your credit report and score and also has Federal income tax consequences.
Have you ever received a Schedule 1099-C because you have had some of your debt forgiven? If so, how does this relate to your credit report?
People must pay taxes on any forgiven debt more than $600, according to the IRS. Lenders must report the amount of the cancelled debt on Form 1099-C. If you received debt relief last year, your lender should have mailed you this form which shows the amount forgiven and the original debt amount.
Why is it counted as taxable income? When the money was borrowed it was not taxable because there was a promise to pay it back. After the debt is renegotiated the obligation to pay the entire debt is no longer in place but that does not eliminate the fact that you received the loan.
I am a Michigan State University Extensionforeclosure counselor, and several clients I worked with had debts forgiven and the debt still showed up on their credit reports as collectable. Sometimes, even when debt has been forgiven, the lender may not have reported it to the credit-reporting bureaus. The debt may have even been sold to a debt collector. If this happens the creditor may have no legal right to collect once the debt has been forgiven and a Schedule 1099-C issued. It’s best to discuss your personal situation with an attorney who specializes in consumer protection if you can’t resolve the issue on your own.
The Form 1099-C denotes debts that have been forgiven by creditors. It is also known as a “cancellation of debt.” According to the IRS, lenders must file this form for each debtor for whom they canceled $600 or more of a debt owed to them. A 1099-C is sent when a consumer settles a debt with a creditor, or the creditor has chosen to not try to collect a debt. It is important to know that when a creditor is no longer attempting to collect any of the unpaid principal balance on a debt, they must report this amount to the IRS. Review Form 1099-C for accuracy. Financial institutions have issued 1099-C’s for debts they have not tried to collect or issued duplicate forms for the same debt.
An important point to understand is that canceled or settled debts are not the same as debts that have been “paid in full.” If you’ve settled your debts, they will appear on your credit report and are considered derogatory because it basically means your loan went into default. This information can remain on your credit report for up to seven years.
If you are able to get your debt completely canceled, you then no longer have any responsibility for the amount owed. But the creditor must report the canceled amount or settled debt to the IRS using the Form 1099-C cancellation of debt. The amount that was canceled is now considered income to you and it must be reported as such on your tax return.
Tip: Keep in mind that you can settle your debts on your own. One way of trying to make ends meet is to negotiate with creditors. By reducing the amount of debt owed, families can reach agreement on payment plans they can afford. Creditors are usually willing to negotiate a payment plan as they are happier receiving some payment rather than no payment. Paying a company to do it just takes more money out of your pocket that could have been used to pay off some of the debt.
If, at the time your debt was canceled, you had a negative net worth, you may be considered insolvent. This gives you the opportunity to check if you have to report all or part of the charge-off to the IRS. You’d have to file IRS Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness," if you want to claim the insolvency exemption.
Given all of that, it may still be a very good idea to settle some or all of your debts. As long as you understand that doing so will technically increase your income resulting in less of a tax refund or putting you in a situation where you have to pay additional federal income tax. Of course, always consult a reputable tax professional with tax-related questions.
If you and your family or someone you know is struggling with creditors there are resources available to help. It is difficult to talk about money problems and can be hard to put your situation into words when dealing with creditors. The MSU Extension website MI Money Health has many tips and sample letters to write creditors. Families must be honest about their situation and have a reasonable plan they can afford. Also, it is important to get any agreement in writing.
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FAQs
Key Takeaways
If you receive a 1099-C, you may have to report the amount shown as taxable income on your income tax return. Because it's considered income, the canceled debt has tax consequences and may lower any tax refund you are due.
Can a creditor still collect after issuing a 1099-C? ›
If a creditor continues to attempt to collect the debt after you receive a 1099-C, the debt may not have been canceled and you may not have income from a canceled debt. Verify your specific situation with the creditor.
What percentage of taxes do you pay on a 1099-C? ›
Your income, including amounts listed on your 1099-Cs, gets taxed at the normal progressive rate, which ranges from 10% to 37%. How much tax you will owe depends on your tax bracket, filing status, credits, and deductions.
What happens if I don't receive my 1099c? ›
Even if you didn't receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies. Amount of canceled debt.
How much tax do you pay on cancelled debt? ›
The law requires that you report all taxable canceled debt as income on your tax return, even if the amount is less than $600 and you didn't receive a Form 1099-C. Canceled debt is taxed at same rate as your ordinary income, which can be anywhere from 10% to 37% depending on your total taxable income.
How much tax do you pay on settled debt? ›
Tax implications of debt settlement
Since debt forgiveness is considered to be income by the Internal Revenue Service (IRS), you'll have to file the forgiven amount as “other income” on your tax return and pay the normal income tax rate.
Is it good to use a debt settlement company? ›
Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you. Unless the debt settlement company settles all or most of your debts, the built-up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.
How to remove cancelled debt from credit report? ›
How to Remove Canceled Debt From Your Credit Report. In general, you can't get discharged debt removed from your credit report unless the information is inaccurate. In that case, you have the right to file a dispute with the credit reporting agencies.
How to avoid taxes on settlement money? ›
Strategies to Minimize Tax Liability
- Allocate Damages Appropriately. ...
- Spread Payments Over Time. ...
- Consider Qualified Settlement Funds. ...
- Take Advantage of Capital Gains Treatment. ...
- Seek Professional Tax Advice. ...
- Eliminate the Taxation of Attorney Fee Portion.
Thus, the failure of the debtor to make a payment for 36 months generally requires the creditor to file and furnish a Form 1099-C, even if the creditor has not ceased collection activities and discharged the debt.
While you don't have to file the 1099-C, you should use it to prepare and file your income tax return. In some cases, your forgiven debt is taxable – and in some it's not. When it is taxable nonbusiness debt, you'll use the copy of the 1099-C to use to report it on Schedule 1 of Form 1040 as other income.
How to prove insolvency for 1099-C? ›
File IRS form 982 with your 1040 income tax form. The form is located at the IRS' website here: https://www.irs.gov/pub/irs-pdf/f982.pdf. Simply list the dollar amount shown on the 1099c and indicate 1. (b) on the 982 form that you are insolvent.
How bad does a 1099 affect my taxes? ›
Q. What percentage do you pay in taxes on a 1099 form? Any 1099 income above $400 is taxed at a 15.3% fixed rate by the IRS. This includes 12.4% for Social Security and 2.9% for Medicare.
Does a 1099 mean I owe money? ›
A 1099 is a type of form that shows income you received that wasn't from your employer. Getting a 1099 form doesn't mean you necessarily owe taxes on that income, but you will have to report it to the IRS on your tax return.
Does cancellation of debt affect your credit? ›
If you are facing serious financial difficulties, you may be able to get all or a portion of your debts canceled. However, debt cancellation can have long-term negative consequences to your credit, and you should consider it only when there are no better alternatives for you.
Is a charge off considered income? ›
The IRS Clearly defines a charge off as Gross or Ordinary income, INCOME DOES NOT GET REPORTED ON THE CONSUMER REPORT which in fact makes reporting of this account inaccurate! I provided a screenshot from the IRS website. By Definition, the IRS Clearly says a Cancelled debt or Charge off is Income.
