What is a 1099-C?

If you or a Debt Settlement Company has helped you settle a debt for less than the balance, the difference is reported to the IRS by the original creditor as a loss.

The IRS looks at this settled or "forgiven" amount as if the money was returned to you, even though it wasn't. The IRS is thinking that you will have to include this amount as additional income and therefore pay additional tax on it!

Sadly, most tax preparers and/or accountants are not aware of how to EXCLUDE a settled debt from being included as additional income.

HERE'S WHAT YOU NEE TO DO IF YOU RECEIVE A 1099-C:

According to the IRS, the amount of forgiveness (for the sake of this article, we are talking about unsecured debt) IS EXCLUDED if at the TIME OF FORGIVENESS, you were INSOLVENT.

INSOLVENT means that your liabilities are more than your assets or in other words, you have a negative net worth.

Sounds terrible, but in reality, in this case, it is good for you.

Let's say that when you list all of your assets:

• Home equity
• Net value or current value of your car
• Home items (furniture, tools, stuff)
• Savings accounts (stocks, bonds, yeah...right!)

Now offset that by all of your debt:

• Mortgage
• Car payment
• Student Loan(s)
• Medical Bills
• Credit Cards
• Personal Loans
• Equity Line of Credit

Most likely, your net worth (Assets - liabilities) will be negative.

Using IRS Form 982, you will check the box in Part 1, on line 1-b that states Discharge of indebtedness to the extent of insolvency.

It is also helpful to write a brief (I said brief...don't say too much) explaining why you were insolvent.

Attach this with the Asset-liabilities Worksheet together with the Form 982 and send in with your tax return.

That should do it!  If you would like a more complete explanation of how the IRS treats forgiven debt and insolvency, click here.

Do you still have debts that need to be settled? We can help! Click the link -->> FREE DEBT ELIMINATION SUMMARY or give us a call!

1-877-492-4109

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What is a 1099-C?

A 1099-C is a statement from the IRS that you may need to include the amount of a forgiven or settled debt as income.

Let's say you are going through a very tough time financially and cannot keep up with the payments on your credit cards or personal loans.

At some point, you (or a Debt Settlement Company), may be able to negotiate a settlement on the debt you owe for less than the balance.

If the amount forgiven is over $600, the creditor may claim that as a loss to the IRS and you would then receive a form 1099-C.

At first glance, it looks as though you have no choice but to include the amount forgiven as additional income and therefore, you may have to pay additional income tax!

According to IRS Form 4681, you DO NOT HAVE TO INCLUDE the amount forgiven or settled if at the time of the forgiveness you were INSOLVENT.

Sadly, most accountants or tax preparers are unaware of how to avoid this additional tax.

How to prove you were INSOLVENT:

List all of your assets.  Your assets include:

Equity in your home. (What your home would sell for today less what you owe.)

Cash, stocks, bonds, mutual funds. (Come on...most people who are in a financial crunch don't have extra money laying around!)

The net or current values of your "things":

• Car (it's probably not worth as much as you think!)
• Boat, Four-Wheeler, Motorcycle, etc.
• Furniture, tools, (get the idea?)


Now, you are going to offset this by the debt you owe:

• Mortgage (don't forget the 2nd or equity line of credit
• Student loans
• Auto loan
• Personal loans
• Credit cards
• Store cards
• Back taxes!
• Medical bills

This should show that at the time of forgiveness, you were insolvent (you owe more than your worth).

You will submit this financial worksheet along with IRS Form 982 with your tax forms.

If your tax preparer is not aware or does not seem competent dealing with this procedure, let us help!

In over 8 years of helping people reduce their debt, we have not had a client pay any additional income tax as a result of a settlement!

Need More Info? Give us a call today!

1-877-492-41096

 photo by: Stefan Baudy

We get dozens of calls each year around tax time asking about the 1099-C IRS form.

If in the last taxable year you or a Debt Settlement Company had negotiated a settlement on one of your unsecured accounts, you will most likely receive a 1099-C form if the amount was over $600.

Unfortunately, many tax preparers don't know how to have settled or forgiven amount excluded from taxable income.

The most important question is:

"At the time of forgiveness (IRS term for settlement), were you INSOLVENT?"

What is INSOLVENT?

In IRS Form 4681, it gives the typical, a little hard to understand explanation of what the IRS deems INSOLVENCY to mean.

Basically, if your total assets are less or equal to your total liabilities, then you were INSOLVENT at the time of forgiveness and therefore the forgiven amount is excluded from additional taxable income.

What do you need to do?

List all of your assets:

• Equity in your home
• Equity in you car or cars
• Cash in the bank or retirement accounts
• Net value of any other property (rental, furniture, jewelry, collections, etc.)

List all of your liabilities:

• mortgage you still owe (maybe a 2nd as well)
• Amount you still owe on your car or cars
• All of your unsecured debt (including the final balance of the debt forgiven.
• All loans, student loans, medical bills outstanding, etc.

Subtract the total liabilities from total assets.

If you are equal or negative, then you were INSOLVENT at the time of the settlement or forgiveness and therefore the amount WILL NOT BE INCLUDED AS TAXABLE INCOME.

When you mail your tax form, you will include:

• A brief (brief) statement that you were INSOLVENT at the time of the settlement and that this amount should be excluded from taxable income.
• Copy of your Assets vs. Liabilities
• IRS Form 982

You can get a copy of IRS Form 982 by clicking here.

Put your name and Social Security number in the boxes at the top.

Check the box in Part 1, 1-b that states, Discharge of indetedness to the extent insolvent (not in a title 11 case).

That should do it.

If you would like more information about the IRS's definition of INSOLVENTCY, see IRS Form 4681, page 5.

If you feel overwhelmed and need some FREE ADVICE, or you need more help with the 1099-C, please click on our FREE DEBT SUMMARY link.

 photo by: Horia Varlan