The
1099-C must be entered into your tax return because you'll have to report the
amount on that 1099-C form to
the Internal Revenue Service as taxable income.
In
general, if you have cancellation of debt income because your debt is canceled,
forgiven, or discharged for less than the amount you must pay, the amount of
the canceled debt is taxable and you must report the canceled debt on your tax
return for the year the cancellation occurs. The canceled debt isn't taxable,
however, if the law specifically allows you to exclude it from gross income.
These specific exclusions will be discussed later.
After a debt is canceled, the creditor may send you
a Form 1099-C (PDF), Cancellation of Debt, showing
the amount of cancellation of debt and the date of cancellation, among other
things. If you received a Form 1099-C showing incorrect information, contact
the creditor to make corrections. For example, if the creditor is continuing to
try to collect the debt after sending you a Form 1099-C, the creditor may not
have canceled the debt and, as a result, you may not have income from a
canceled debt. You should verify with the creditor your specific situation.
Your responsibility to report the taxable amount of canceled debt as income on
your tax return for the year when the cancellation occurs doesn't change
whether or not you receive a correct Form 1099-C.
In general, you must report any taxable amount of a
canceled debt as ordinary income from the cancellation of debt on Form 1040 (PDF), U.S. Individual Income Tax Return, Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return, if the debt is a nonbusiness debt, or an applicable
schedule if the debt is a business debt, as explained in Publication 4681 (PDF), Canceled Debts, Foreclosures, Repossessions, and Abandonments
(for Individuals).
Caution: If
property secured your debt and the creditor takes that property in full or
partial satisfaction of your debt, you're treated as having sold that property
for the amount of the canceled debt and may have a taxable gain or loss. The
gain or loss on a deemed sale of your property is an issue separate from
whether any cancellation of debt income associated with that same property is
includable in gross income. See Publication 544, Sales
and Other Dispositions of Assets, and Publication 523, Selling
Your Home, for detailed information on
reporting gain or loss from repossession, foreclosure, or abandonment of
property.
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