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1099 C Social Security

I received a 1099 C for a canceled credit card debt. I receive Social Security Disability and normally do not need to file taxes. My net benefits for 2015 were $16,414.80 How should I proceed? Do I need to file taxes? Do I need to file an insolvency exemption to the IRS? Do I need to report insolvency so that canceled debt isn't taxed? 

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Level 9

1099 C Social Security

My recommendation is to file, even though you may not be required to.  The IRS will be looking for the 1099-C since they received a copy of it as well. To avoid the summer correspondence from them, it's best to file even if the 1099-C debt may not be taxable due to a filing requirements (explained below).

In general, you don't have to file unless one-half of your social security benefits plus your other gross income (your cancelled debt and any tax-exempt interest) is more than $25,000 ($32K if married filing jointly).

If you are required to file, the cancelled debt will be taxable unless you show to the IRS that you were insolvent.  To file insolvency, you would have to use Turbo Tax cd/download versions, and manually fill out form 982 and its insolvency worksheet. It cannot be done online.

I also recommend that you determine your insolvency situation by using worksheet on page 8 of the IRS publication 4681 first, then - once you know you need it, you can purchase cd/download Turbo Tax.

https://www.irs.gov/pub/irs-pdf/p4681.pdf

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Level 9

1099 C Social Security

My recommendation is to file, even though you may not be required to.  The IRS will be looking for the 1099-C since they received a copy of it as well. To avoid the summer correspondence from them, it's best to file even if the 1099-C debt may not be taxable due to a filing requirements (explained below).

In general, you don't have to file unless one-half of your social security benefits plus your other gross income (your cancelled debt and any tax-exempt interest) is more than $25,000 ($32K if married filing jointly).

If you are required to file, the cancelled debt will be taxable unless you show to the IRS that you were insolvent.  To file insolvency, you would have to use Turbo Tax cd/download versions, and manually fill out form 982 and its insolvency worksheet. It cannot be done online.

I also recommend that you determine your insolvency situation by using worksheet on page 8 of the IRS publication 4681 first, then - once you know you need it, you can purchase cd/download Turbo Tax.

https://www.irs.gov/pub/irs-pdf/p4681.pdf

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1099 C Social Security

Thank you for your assistance.
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Level 9

1099 C Social Security

I'm glad I could help; good luck in 2016!
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1099 C Social Security

I understand that cancellation of debt is taxable however the IRS seems to think that it also affects how much money I can earn since I’m 64 years old and collecting Social Security.  They are taking the little bit that I earned and adding the cancellation of debt on top of that and saying I earned more than allowable without additional taxes

 

dave

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Employee Tax Expert

1099 C Social Security

If you are talking about how much Social Security says you can earn if you are under full retirement age, they shouldn't be counting Cancellation of Debt Income as earned income. But that's not handled by the IRS, that's handled by the SSA.

 

But if you are talking about how much tax you pay on your 1099-C, as MargaretL explained, 1/2 of your Social Security benefit is added to the rest of your income to compute how much of your Social Security is taxable, if any. That is handled by the IRS on your tax return, and is calculated the same whether your income is earned, like wages, or unearned, like Cancellation of Debt.

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