Cancellation of Debt due to Bankruptcy should it show as income?

[johnandmuriel]

We received a 1099c and this debt was canceled due to  a Bankruptcy.  Is this still considered income? or is there another form that I need to fill out so this doesn't show up as income

[MichaelDC · Accepted solution]

Yes. You need to include this on your return.

If your debt was discharged in a Title 11 bankruptcy proceeding, such as a Chapter 7 or Chapter 13 case, you're not responsible for taxes on that debt.

However, if the debt, or part of it, was canceled before you filed bankruptcy (through debt settlement or negotiation, for example), the creditor must issue the 1099-C and that debt is not excluded, because it was not discharged in bankruptcy. As a result, even if you later file bankruptcy, you may owe tax on that debt cancellation income unless you were insolvent at the time you settled it.

To claim the exclusion due to bankruptcy, you'll need to use either the download version or the CD version of TurboTax. With either of these versions, you'll be able to access Form 982 to easily make a notation regarding your bankruptcy.

If you started your 2016 return in TurboTax Online and want to switch to the TurboTax download/cd version, click here.

Note: if  already paid for TurboTax online, contact our support representative ; otherwise proceed with the desktop purchase.

Once you have the Download/CD version, there are two steps to claim your exclusion.

1. Enter Form 1099-C, then
2. Adjust Form 1099-C
3. Fill-in Cancelled Debt Worksheet
4. Verify Form 982

1. Enter Form 1099-C:

1. Open (continue) your return.
2. In the TurboTax program, search for 1099-C or 1099C (lower-case works also) and then click the "Jump to" link in the search results.
3. Indicate the debt was cancelled on your main home, how many 1099-C forms you received, select No to second mortgage, and
   
4. Check None of the above for Tell Us About Your Main Home
   
5. Enter the values from the Form.
   
6. Select the type of cancelled debt (main home or other) and then click Continue.
7. Follow the onscreen instructions to enter information from your 1099-C
8. It will say that "Your Debt is Taxable", however, the following workaround will exclude it from income.

2. Adjust Form 1099-C

1. Click Forms in the upper right corner of your screen
2. Locate 1099-C Untitled (in the left column) and open it by clicking on it; 
3. Fill out the remaining information from your actual form; be sure that box 6 code matches your form’s entry; it should be A for Bankruptcy

3. Fill-in Cancelled Debt Worksheet

1. Locate Cancelled debt worksheet (right below 1099-C). It will titled “cancelled debt (whatever your debt description is in box 4 of 1099C) and open it.
2. Part I and II will be pre-filled. Complete applicable entries in part III.
3. Scroll down to part IV- line 37 must be checked Yes.

4. Verify Form 982

In "Form Mode", scroll in the left column to Form 982 and Click. It will open the form.
No entries are needed on the form, be sure line 1a is checked as a discharge of indebtedness in a title 11 case.

[edited with stream-lined instructions, 2/1/2016]

[Nataliecard]

Need to cancel  order at this time

[BrandiLO]

This situation is handled best by contacting customer care. Please click here for directions.