The following is a question about 1099-C Cancellation of Debt:
I had a creditor cancel a $3800 debt and issue me a 1099-c. At the time they cancelled it I had a total debt of about $32000 and about $25000 in assets. I plan to use form 982 to avoid paying taxes on this. If I check box 1b and enter the amount on line 2, is there anything else to do?
Creditor Canceling Debt 1099-C Information
For line 10a I’m supposed to enter the lesser of the basis of my assets, the debt cancelled, or the total excess of my assets over my total debt. Since I still owe more than I have in assets that would be a negative number. Do I just enter 0 on line 10a?
1099-C Answer about Cancellation of Debt:
#1; You must fill out IRS Form 982 if you have been released of an obligation to pay a financial obligation. Such discharge must be reported to the tax authority, as it may qualify as income, and be therefore subject to income tax., but you are allowed to exclude that discharged debt under certain circumstances and you use Form 982 to do that. If the 1099-c received was for credit card debt, then you need to check the box 1 b; If you received one or multiple 1099-c forms then you add up the totals of all forms you received and place that total on line 2. Many consumers have no clue what the 1099-C forms are, and some may be trashing the cancellation of debt notices because the forms are sent by creditors or debt collectors with whom they thought they no longer had business
Information on IRS Form 982
#2; Line 10a is for credit card debt settlement. You must put the same amount you placed on line 2 on line 10a. Then must match as you will earn yourself an instant audit, which none of us want. You need to fill out an insolvency worksheet. If filling by mail, this worksheet MUST be included with the 982 regardless of if you have to pay taxes on the settlement or not.
Input, on line 2 of 982, the total amount of forgiven debt you wish to exclude from income. Generally, this will be the amount reported to you on Form 1099-C.Input, on Part II the amount from line two onto line 10a, “Applied to reduce the basis of nondepreciable and depreciable property.Insolvency is calculated with FMV of assets.Tax attribute reduction (if there are no NOLs, capital losses, etc) is based on book value.For example a 10 year old car worth $3K, may have cost $25K. You use the $25K value in the attribute reductions. If you still come up negative after using cost bases, then you put $0 on 10a and explain in the attached statement that you have reached the reduction limit.
SO, If your total debts AFTER the cancelled debt EXCEED your total assets at their adjusted bases, then you have reached the debt reduction limit and the value for 10a would be $0
Determine if the forgiveness of your debt is related to a qualifying event
You need to determine if the forgiveness of your debt is related to a qualifying event. Typically, the only qualifying reasons for the forgiveness of nonbusiness bad debts, such as credit card debt, are a Ch. 11 bankruptcy or declared insolvency of the taxpayer. If either of these two events do not apply, you may generally not file Form 982 for credit card debt forgiveness and must report the forgiven debt as ordinary income