Question by Scott J: Does a 1099C have to be filed the same year as the debt settlement?
I settled a debt in July of 2007 but didn’t receive a 1099C until today (02/02/2009) for tax year 2008. Shouldn’t the 1099C have been filed for tax year 2007 since the settlement occurred in July of 2007? What should I do?
Answer by netdebt1
Your best bet here it to consult a tax professional, but you could also contact the entity that settled the debt. They might have written off the loss in 08 which is why you got your 1099C later.
There is also a possibility that you don’t have to pay taxes on this if you were insolvent.
Another common objection to debt settlement is that debtors whose debts are partially canceled outside the bankruptcy system will need to report the canceled portion of the debt as taxable income. (IRS Publication 908)
The IRS considers $ 600 or more of forgiven debt as taxable income. The forgiving creditor must provide the taxpayer with a 1099-C tax form. This form will list the amount of forgiven debt and interest in Box 2. Taxpayers with portions of personal loans forgiven may not subtract the interest reported in Box 3 from the amount of reportable income on this form.
However, the IRS does not require taxpayers to report forgiven debt if the tax payer was insolvent at the time the creditor forgave the debt. Being insolvent means that the amount of a debtor’s debts are greater than his/her assets (how much money and property the debtor owns). However, the IRS adds that “you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent.”
For example, if a taxpayer is $ 10,000 in debt and owns $ 3,000 in assets, he/she cannot exclude more than $ 7,000 of forgiven debt from his/her income tax. Any forgiven debt over $ 7,000 that year must be reported as taxable income.
Give your answer to this question below!