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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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I had a 1099-C for about $135,000. My husband didn't have any withholding on Social Security. His employer couldn't withhold due to incompetence. I felt utter dread wash over me. Memories of owing the IRS before were constantly on my mind. I called a local CPA. Besides being clueless, he wanted to charge me for every question I had about insolvency. I looked on line and found little hope of the countless stories of permanently disabled people like myself getting their student loans forgiven only to be asked to pay taxes on it as if it were income.
Somewhere, somehow, I find an article by Gary Bode. I bookmarked it for when it's time to do the actual taxes. With his excellent help in how to do all of this out of a virtual office I get my part of the work done. My questions got answered, for free. I give a retainer, do what I said I did and wait. I hear from Gary. I go into shock! How can this be? Not only do I not owe on the 135,000....Gary itemizes and after paying what was almost nothing in taxes we get $950.00 back! No more hubby doing the taxes online! I will use Gary Bode as long as he will agree to work with me!
It was so easy, no worries, but professional and top notch. I know I have thanked you Gary but I am so grateful. Thank you ever so much again!

Carla Bray

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Cancelled Debt Tax Reporting for Student Loans | Form 982 CPA explains how to handle IRS Form 1099-C, Cancellation of Debt

Cancelled debt tax reporting is tricky. Plus there’s usually a large potential tax liability riding on proper preparation of Form 982. For a free cancelled debt consult call (910) 399-2705. The virtual office means distance or location isn’t a factor for engaging me.

Cancelled debt tax reporting for student loans generally uses the Insolvency provision of Form 982, Reduction of Tax Attributes. This post deals with how to battle a Form 1099-C, Cancellation of Debt, for student loan debt. I’ll try to cover the most common student loan cancelled debt questions I hear as a Form 982 CPA, whether through our free consult offer or comments on our website. But, some background first.

Emotional aspects of cancelled debt tax reporting

  • I’m not a Psychologist, but cancelled debt seems to cause more anxiety than any other type of tax reporting. The Client has been through financial hard times and Form 1099-C just opens up that wound again.
  • The IRS Form 982 instructions and Publication 4681 cover the entire scope of cancelled debt tax reporting making self-preparation intimidating.
  • There’s a lot of potential tax liability increasing anxiety.

What is Cancelled Debt?

Cancelled debt occurs when a lender writes off some or all the money you owe to them. Typical scenarios that generate debt cancellation include:

  • Student Loan cancelled debt. Sometimes called student loan forgiveness.
  • Cancelled credit card debt.
  • Cancelled student loan debt.
  • Car repossession.
  • Foreclosure on your home.
  • Short Sale of your home.
  • Loan modification for your home mortgage.
  • Foreclosure on your rental real estate property.
  • Short Sale of your rental real estate property.
  • Loan modification for your rental real estate mortgage.

Sometimes your student loan cancelled debt is an “exception” and incurs no tax. So research that first using IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. But in my experience, once you receive a Form 1099-C for student loan debt cancellation, the amount in Box 2 is taxable unless you can exclude by using Form 982, Reduction of Tax Attributes.

The typical IRS tax forms involved with canceled debt tax reporting:

  • IRS Form 1099-C, Cancellation of Debt. The lender sends Form 1099-C to you and the IRS. The amount in Box 2 of Form 1099-C becomes taxable income unless you exclude it through use of Form 982. 5.3 million Form 1099-C(s) got issued for 2012. Since Form 1099-C is often late, there could easily be another 250,000 2012 Form 1099-Cs for 2012 issued for 2013. I regularly amend earlier tax returns to include a late arriving Form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes.
  • IRS Form 982, Reduction of Tax Attributes. Form 982 offers multiple exceptions and exclusions for preventing Box 2 of Form 1099-C from becoming cancelled debt income on Line 21 of Form 1040. Some of the Form 982 provisions are:
    • Bankruptcy.
    • Insolvency.
      • Student loan cancelled debt usually uses the Insolvency provision.
    • Exclusion for Qualified Principal Residence Debt.
    • Exclusion for Qualified Real Property Business Debt.
    • Exclusion for Qualified Farm Debt.
  • IRS Form 1040.

Can Lenders still try to collect the cancelled debt once they issue Form 1099-C, Cancellation of Debt?

Yes. Sometimes. I know it seems unfair.

Form 982, Reduction of Tax Attributes

Form 982 presents the results of the IRS Insolvency Worksheets e.g. cancelled debt you can’t exclude on Form 982 for taxable income. The tax reporting rules for cancelled debt depend on what provision you’re using on Form 982.

Here’s good post providing comprehensive examples of how to handle student loan cancelled debt.

Exclusion of cancelled debt through Form 982 isn’t always a free ride. Sometimes it just delays IRS tax liability until you sell one of your assets. There’s some tax positioning possible for cancelled debt tax reporting, but it takes time to set up.

“Never pay tax on student loan cancelled debt without rigorously exploiting Form 982.”
- Gary Bode, Form 982 CPA

Is Form 982 an IRS red flag?

Well I think the IRS never likes to give up taxable income without a fight. Plus there’s undoubtedly a high percentage of self prepared tax reporting that’s inaccurate. But with the millions of Form 1099-C generated it seems unlikely the IRS has enough resources to audit many Form 982 tax returns.

As a Form 982 CPA, I present tax documentation and explanations when I feel it necessary.

Amending your prior tax returns for a late Form 1099-C, Cancellation of Debt

I routinely amend prior tax returns when a Client receives a late Form 1099-C. But often it’s an IRS Notice CP2000 that prompts a call to me. Many folks don’t receive the Form 1099-C. But they don’t look for it either. Notice CP2000 proposes tax on the entire amount of cancelled debt in Box 2 of a Form 1099-C the client never received.

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10 comments to Cancelled Debt Tax Reporting for Student Loans | Form 982 CPA explains how to handle IRS Form 1099-C, Cancellation of Debt

  • Kristi R

    I am on SSI with no assets and received 1099C for discharged student loans. How do I file this since I’m not required to file a tax return in the first place

    • Hi Kristi: I think the IRS Form 1099-C, Cancellation of Debt, requires a tax return, even though it sounds like you won’t owe any taxes. You’d use Form 982 to exclude the cancelled debt from taxable income. Here’s a link to excellent example for self preparation of student loan cancelled debt. https://www.form982.com/cancelled-student-loan-debt-from-irs-form-1099-c-through-irs-form-982-to-form-1040/

  • Kelly Q

    I have 3 1009-Cs coming in from old credit card debt that I settled in 2013 (one in April 2013, one in May 2013 and one in October 2013). I will be doing the Insolvency exception as my liabilities far outweigh my assets. Do I complete an insolvency worksheet on each settlement to determine insolvency on each debt based off the account balances at that given point in time? After that is completed do I roll up the total outcome and enter on only one 982 form for 2013?

  • Dianna

    Hello Gary,
    I was honored to receive my 1099-C form in the mail and I think I had a small stroke upon reading the form, never saw it coming, nor was I ever told by Sallie Mae. Anyway, I am disabled and my student loan cancellation totals right at $60,000. I do not work because I am unable too, my husband receives Social Security and has a part time job. The only asset I have is a piece of land 50′ by 100′ valued at about $4,900 and my husband has a truck valued at about $2,500 so when all is said and done on this years taxes we owed $7,013 because of the loans. We have already filed our taxes this morning before I heard you on the 700 Club and would like to know if we can amend our taxes and use the forms you are suggesting that we use.

    • Hi Dianna. High honor indeed. Sure you can amend that return. I’m not aware of any reference to me on the 700 Club. But it sounds like you can exclude some of the cancelled debt from Form 1099-C by using Form 982, Reduction of Tax Attributes. We’re happy to prepare that amended tax return for you.

  • Aimee

    Hello Gary, I am so glad I found your site. I have a 1099-c for a student loan due to disability. I also filed for bankruptcy. The 1099 is July 2013 and my bankruptcy was finalized July 2013. So would those debts still have been on me until it was finalized? That’s the only way I can claim insolvent.

    Thank you

  • William Zornes

    Hi Gary

    My name is Bill Zornes I was injured on the job 7 and half years ago and I am on SSDI and have not worked since my injury. I got a 1099 C for a Student loan cancellation for 37,000.00 I am 65 and not able to work do to my injury. I have a lot of doctor bills and I will not be able to pay the taxes. Is there anything I can do?

    Thank You
    William Zornes
    wzornes@yahoo.com

    • Absolutely there are things you can do Bill. One; you can probably get rid of all the cancelled debt with the 2014 tax return. But, 2, in your case let’s say you owe them $20,000. You would be a hardship case where your and the IRS agree you owe the $20,000 but collecting that would make you homeless perhaps. At age 65 that hardship case could be for life.

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