Credit card debtors may be sent a 1099-C form for the 2011 tax year. In fact, the IRS projects that 6.4 million of these forms will be sent to debtors, up from 3.9 million in 2010 and likely due to the increase in defaults. Find out if receiving this form means you owe more taxes.
What is a 1099-C form?
This form is sent by the lender to each debtor and the IRS in which $600 or more of the debt owed to the lender was cancelled. Since the IRS treats the cancellation of debt as income, in most cases the amount discharged must be reported as income on the debtor’s tax return.
How do I know if I owe taxes?
You will almost always owe taxes if your lender issued you a 1099-C form. One exception is if the amount discharged was part of a bankruptcy settlement. The other reason could be if there was an error reported on the 1099-C form as this scenario is not completely uncommon. Most discharged debts are from prior years which can make record-keeping for the lender a burden and thus the possibility for mistakes.
What if the discharged debt was part of a bankruptcy settlement?
If the debt was discharged in bankruptcy, the amount is exempt from taxation. In this case, you would report the 1099-C amount of discharged debt on Schedule D of your Form 1040. On the next line of Schedule D, you will deduct the same amount, and indicate that the debt was discharged in bankruptcy. You must cite the appropriate bankruptcy case number on the schedule to support your claim.
More tax questions? Browse answers or ask your tax questions online.
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