There are exceptions to reporting. In particular, where a debt is discharged in bankruptcy, the IRS does not require issuance of a C unlessit was incurred for business or investment purposes. Cancellation or discharge of consumer debt in bankruptcy need not be reported on a C. But it can be. I have written on this topic before (), but with tax time approaching and being a near record year for bankruptcy and foreclosure, it is time to re-visit the tax reporting and implications related to mortgage debt after karacto.xyz’s set the stage: you (the debtor) received a bankruptcy discharge in and as part of that process surrendered your home (allowed it to foreclose or. If you filed for bankruptcy and discharged the debt on the C in bankruptcy, then you should check box 1a. This box says “Discharge of indebtedness in a title 11 case” Title 11 is the bankruptcy code.
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In addition, this information is subject to change and is not guaranteed accurate. The next step is to visit the IRS website or contact your CPA for the latest C tax information and for help with your specific tax situation. If you or someone you know needs help understanding their bankruptcy options, making important legal decisions, or requires professional bankruptcy representation, then contact our experienced bankruptcy attorneys at Cohen and Cohen.
To schedule an initial consultation to review your case with a Colorado bankruptcy attorney at our convenient central Denver location, call Robertson Cohen. Robertson B. Alexander Musz. Wesley Parks. Katharine Sender. Denver Attorneys Cohen and Cohen, P. Protecting the rights of our clients through firm and just legal services! Denver, Colorado. Why was I sent a C after my bankruptcy discharge?
If your property was subject to a nonrecourse debt, your amount realized is the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property you received. You will not have ordinary income resulting from debt cancellation.
See Publication , Canceled Debts, Foreclosures, Repossessions, and Abandonments for Individuals PDF for detailed information on canceled debt and on reporting gain or loss from repossession, foreclosure, or abandonment of property.
Amounts that meet the requirements for any of the following exceptions aren't cancellation of debt income. Amounts that meet the requirements for any of the following exclusions aren't included in income, even though they're cancellation of debt income. Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes certain credits and carryovers, losses and carryovers, basis of assets, etc.
You must attach to your tax return a Form , Reduction of Tax Attributes Due to Discharge of Indebtedness and Section Basis Adjustment PDF to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes. For cancellation of qualified principal residence indebtedness that you exclude from income, you must only reduce your basis in your principal residence. Please see IR for guidance for students with discharged student loans and their creditors.
Refer to Publication , Canceled Debts, Foreclosures, Repossessions, and Abandonments for Individuals PDF for more detailed information regarding taxability of canceled debt, how to report it, and related exceptions and exclusions. Publication , Taxable and Nontaxable Income contains additional information. More In Help. The examples below show the difference between how recourse and nonrecourse debt is treated.
In Chapter 7, the trustee liquidates or sells the bankruptcy debtor's non-exempt assets in most cases, there are none. A Chapter 13 is a repayment plan where the the debtor pays monthly payments over 36 to 60 months to a trustee, who uses the funds to pay debts.
In either case, debts left unpaid are discharged. However, debts discharged in bankruptcy are not taxable income, and so the debtor need not report the discharged debts as income, even if he receives a C from a creditor. When a creditor writes off or cancels a debt, the IRS no longer considers that money as income to the creditor, and the creditor can write it off. The IRS doesn't want the potential for taxation of this money to go away, however, so it shifts the liability to the person who owes the money: the debtor.
When a creditor cancels debt and relieves the debtor of responsibility for paying it, in a way, the creditor is giving the debtor money, and the IRS considers the canceled debt to be income.