Disclaimer: We are not qualified tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
For people deep in debt, have poor credit, and have no realistic chance of repaying their debt, debt settlement can be a very valuable tool to get out of debt. The IRS may view any forgiven loan or debt canceled as a form of taxable income.
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Understanding Form 982
IRS Form 982 - Reducing Tax Attributes of Depreciable Property for Cancelled Debt may be used to determine the amount of debt forgiveness that can be excluded from gross income.
To use this form and potentially reduce your tax liability, you must meet one of the following criteria:
- Qualified farm indebtedness
- Debt is qualified real property business debt
- You are insolvent or bankrupt (the former is a financial issue decided by the IRS, and the latter is a legal judgment)
- Debt is qualified principal residence indebtedness
- Debt forgiveness was a gift
If you are eligible to file Form 982, you should consider talking with a certified tax preparer or another tax professional.
Using IRS Form 982
If you are insolvent, part or all of the debt forgiven may be excluded from your insolvency, called an insolvency exclusion.
To claim insolvency:
- Submit Form 982 and bankruptcy declaration if applicable, this
insolvency worksheet, and any Form 1099 C to the IRS
- Provide any additional information as requested
- If approved, you may be eligible for partial or full tax relief on your canceled debt. We recommend consulting with a tax specialist or lawyer for personalized advice.
Learn more by reading how to use the
IRS form 982 and 1099-c cancellation of debt.
Understanding IRS Form 1099 C
IRS Form 1099 C - Cancellation of Debt is a form you will be mailed from your creditor. A 1099 form reports to the IRS any income that is not wages. There are different 1099 forms that cover other income from bartering to distributions on a retirement fund.
Exceptions to Form 1099 C Cancellation
There are a few exceptions to what debt is considered income. These may include:
- Debt discharged by bankruptcy - unless you file late
- Insolvency - with the difference still being taxable as explained above
- Debt qualifies under a business or farm exclusion
- Debt was canceled as a gift
- Debts forgiven includes tax-deductible interest (interest is not included in debt)
- Certain qualified student loans were forgiven for service
- Student loans were discharged because of permanent disability or death
- You received a Paycheck Protection Program loan
Our Conclusion
If you try debt settlement to get out of debt, you may receive a 1099 C for forgiven debt over $600. We strongly encourage you to work with a qualified tax professional to keep your tax bill down and to file these forms properly. If you need to talk to a debt specialists, we offer a
free consultation.
*Disclaimer:
Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.
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