If you've already filed your tax return, and get a form 1099-C in the mail afterwards, it might mean that you didn't report the correct amount of taxable income. Here's what you need to know about the 1099-C, whether or not it will affect your income, and how to correct your tax return to reflect this new information.
What is form 1099-C?
Form 1099-C is used to account for canceled debt, which can result from several situations, such as a home foreclosure or short sale, or a forgiven student loan.
What many people don't realize is that canceled debt counts as income in many cases, and needs to be declared as income. And, while most canceled debts are technically subject to tax, a creditor is only required to send a 1099-C if it forgives more than $600 in debt during one tax year.
Does the cancelled debt count as income?
Not all forgiven debt is counted as income, so before you start to panic, make sure the 1099-C you received will actually have an impact on your taxable income. You can find a full description of the various exceptions in IRS publication 4681 (link opens PDF), but here are one of the common forms of cancelled debt that won't increase your taxable income:
- Forgiven student loan debt, if the forgiveness is based on the debtor working for a certain type of employer, and the loan was made by a governmental source, educational institution, or non-profit organization
- Debt cancelled in a bankruptcy
- If you were insolvent at the time the debt was cancelled
- Any forgiven mortgage debt, up to $1 million (single) or $2 million (married), including mortgage debt forgiven during a restructuring.
Filing an amended tax return
Regardless of whether or not the 1099-C will increase your taxable income, you should be aware that the IRS receives a copy of this form as well, so you should fill out an amended tax return to reflect the changes. If you're claiming one of the allowed exclusions, you still need to tell the IRS why.
To file an amended return, start with IRS form 1040X (link opens PDF). Adjust your taxable income to include the amount of forgiven debt, and explain in part III how you received a 1099-C after you originally filed your return. If you're claiming that the canceled debt shouldn't count as taxable income, you'll also need to file a form 982 (link opens PDF) to explain the reason.
Unfortunately, you can't e-file an amended tax return. After you fill out the necessary paperwork, you'll need to mail it to the IRS center listed on the amended return instructions (link opens PDF).
If the 1099-C results in an increase in your taxable income, the amended return form and instructions will guide you through figuring out how much you owe. You can pay any extra tax by mail, online, or by phone, and it's in your best interest to do so as soon as possible -- interest begins to accumulate on any owed balance retroactive to the due date of the tax return, even if you received the necessary tax forms afterward.
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