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Tax Season! An OC sent me a 1099-C


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So April 15th is right around the corner and if you're like me, you're waiting until the last minute to file. I'm in process of gathering up everything I need and it just so happens I received a 1099-C this year for cancelled debt from an original creditor. Now I'm not complaining that I received it - I walked away from a pretty decent amount of credit card debt several years ago and was only sued on one account by a JDB (dismissed) - after all that if all I have to deal with is a some extra tax liability, I'm okay wit it. I'd much rather give the IRS some money than some scumbag JDB.

 

That being said... the IRS does allow some exceptions for cancelled debt and it's worth looking into, you never know you might not have to pay that little extra in tax liability. I don't know too much about this yet, but I'm starting this thread because I'm going to be looking into it over the next few days and maybe some us will benefit from it. There are some threads where members have mentioned having done this successfully, but that info is scattered around, thought we could use a resource.

 

So far what I understand is that if a person was insolvent (amount of their liabilities exceeded the amount of their assets) at the time immediately before the cancellation, then the 1099-C amount may be be excluded, entirely or partially, from their income.

 

Relevant info and examples here: http://www.irs.gov/publications/p4681/index.html#en_US_2014_publink1000192043

 

Example 1—amount of insolvency more than canceled debt.

In 2014, Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a 2014 Form 1099-C from his credit card lender showing the entire amount of discharged debt of $5,000 in box 2. None of the exceptions to the general rule that canceled debt is included in income apply. Greg uses the Insolvency Worksheet to determine that his total liabilities immediately before the cancellation were $15,000 and the FMV of his total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, Greg was insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets). Because the amount by which Greg was insolvent immediately before the cancellation was more than the amount of his debt canceled, Greg can exclude the entire $5,000 canceled debt from income.

When completing his tax return, Greg checks the box on line 1b of Form 982 and enters $5,000 on line 2. Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Greg does not include any of the $5,000 canceled debt on line 21 of his Form 1040. None of the canceled debt is included in his income.

 

 

Example 2—amount of insolvency less than canceled debt.

The facts are the same as in Example 1 except that Greg's total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation was $7,000. In this case, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt was more than the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.

Greg checks the box on line 1b of Form 982 and includes $3,000 on line 2. Also, Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Additionally, Greg must include $2,000 of canceled debt on line 21 of his Form 1040 (unless another exclusion applies).

 

 

IRS Form 982 and instructions

 

Will follow up once I learn more.

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Looking through the pub I can't see how a JDB would ever qualify as an "applicable entity" but I've read many stories from surprised taxpayers getting a 1099C filed by one.

 

Agree.

 

I've seen them come from OCs, mostly - but I have read a story or two about a JDB issuing them as well.

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So April 15th is right around the corner and if you're like me, you're waiting until the last minute to file. I'm in process of gathering up everything I need and it just so happens I received a 1099-C this year for cancelled debt from an original creditor. Now I'm not complaining that I received it - I walked away from a pretty decent amount of credit card debt several years ago and was only sued on one account by a JDB (dismissed) - after all that if all I have to deal with is a some extra tax liability, I'm okay wit it. I'd much rather give the IRS some money than some scumbag JDB.

 

That being said... the IRS does allow some exceptions for cancelled debt and it's worth looking into, you never know you might not have to pay that little extra in tax liability. I don't know too much about this yet, but I'm starting this thread because I'm going to be looking into it over the next few days and maybe some us will benefit from it. There are some threads where members have mentioned having done this successfully, but that info is scattered around, thought we could use a resource.

 

So far what I understand is that if a person was insolvent (amount of their liabilities exceeded the amount of their assets) at the time immediately before the cancellation, then the 1099-C amount may be be excluded, entirely or partially, from their income.

 

Relevant info and examples here: http://www.irs.gov/publications/p4681/index.html#en_US_2014_publink1000192043

 

 

IRS Form 982 and instructions

 

Will follow up once I learn more.

 

Someone I helped went this route a few years ago. Easy form to fill out. The hardest part is estimating total assets and liabilities. I think it took 10 minutes. I don't think they even received a letter from IRS asking for more details.  

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Do you need to include a list of your assets? How do they know if you didn't just make up a number? I'm confused. I too received a 1099c they sent for tax year 2014, but the debt was charged off in 2011. I owned a house, but it was upside down in 2011, and I do have a retirement that is a 401k, does that need to be included in the calculations?

My mom usually does my taxes, I am so not a tax person lol, I had a lot of debt in 2011, and only 2 older cars, household stuff as assets. Di I figure those in too?

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@shellieh98

 

You do not have to list your assets and their FMV.  One could just make up a number. Would it be wise to do so, of course not. Like a great deal of other things on your tax return, e.g., amount of contributions or the amount of your business expenses, etc., this is based on voluntary compliance. However, should you get audited, you better have receipts or in the case of this insolvency Form 982, the way you came up to the calculation that your liabilities exceeded your assets. Saying you just "guessed" won't cut it.

 

As to the date you use when calculating everything, it has to be immediately prior to when the debt was actually cancelled not when the institution charged it off. Retirement funds are used in determining the total value of your assets as well as personal property, jewelery, etc. For the value of furniture or your 5 year old microwave, you could probably use some nominal amount. You don't have to go on eBay to see what like items are going for. But if it's a 1 year old bedroom set that you paid $8000 for and use $25 for its value, that comes under "won't cut it" (maybe its worth half?) 

 

Now before everyone starts saying that in BK court or in your home state, your house is excluded from your filing (or subject to a homestead exemption) or that you don't include retirement assets, this isn't BK court. This is an accounting calculation that the IRS puts you through, not a legal one.

 

Read IRS Publication 4681 for more details on the calculations etc.

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No it was a credit card. One of the 3 outstanding I have left with 2 more years until it is sol. I guess they chose not to pursue it after my failed bk7 (dismissed, I was 75 bucks over the ways and means test.....dang that christmas overtime). It is for 8000.00, so if I have to claim it, I am going to owe this year. In 2011 I was upside down on my house by 100k, but now I am about even.

@numbersguy. I thought even though they 1099c you it should be when the debt was charged off? I know they have 3 years to 1099c you. So if it was charged off in February. 2011, shouldn't they have sent me that last February. Rather than dec. ? Or does it matter since it is in the same tax year?

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I'd have to go back and see what constitues an "event" for purposes of the three years but essentially, you are correct in assuming that since it is within the same tax year, you'd have to claim the amount.

 

As to a assessment letter that you received in connection with your property taxes, it depends on what your taxing authority uses to determine assessed value. Some use fair market value, others may use some other method. 

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I don't know.  I do know that in 2011 fair market was about 80,000 less than what IRS said my home was worth.  I was very pissed.  2012 it was dropped by the IRS by about 65k.  (catching up I guess with current market)  So in 2014 I am about 50 k less than fair market, so I suspect it will go up in 2015.

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But if you ask me, my home is worth about 300k lmao.  like homes say 249k, and IRS says about 200k.  ok, I guess ill take it.

 

Luckily home values are subjective. If you have a source that gives you the value that you need to make your case for insolvency, then use it. If not, keep looking, lol.

 

I haven't had much time to deal with my taxes, so I'll be filing an extension today.

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If you are excluding any income from the 1099-C, you must include for 982 so that the IRS can see what you are doing. If you are simply adding the entire 1099-C to your income, you simply put the amount on the other line and label it as cancelled debt. The IRS will then see that you are not ignoring the 1099-C.

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