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Insolvency CPA discusses tax problems with Credit Card Cancelled of Debt | federal 2015 tax form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes | Form 982 instructions

Form 982 CPA tax accountant. Form 1099-C CPA tax accountant. IRS instructions for Form 982. Form 982 instructions. Cancelled credit card debt. S Corporation cancelled debt. Form 1120S instructions.

The Form 982 instructions intimidate some taxpayers. Sometimes there’s too much info to ferret out what you need. Other times the IRS instructions for Form 982 need to be augmented with additional Forms, all of which have their own instructions. I’m an insolvency CPA that offers a free consult on cancelled debt issues. (910) 399-2705.

Insolvency CPAs see tax problems with clients who negotiated credit card debt cancellation. Based on my calls during late 2015, I expect the number of Form 1099-C(s) issued to increase during the eventual 2016 tax preparation season. Some new clients don’t realize that cancelled credit card debt becomes taxable income. So I’ll touch on some main issues:

  • Form 982 instructions.
  • Dealing with the credit card companies.
  • S Corporation cancelled debt.
  • Tax problems arising from cancelled debt, including federal tax forms 1099-C, Cancellation of Debt, and 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
  • Cash flow planning.
  • Cancelled debt strategies.

Form 982 instructions

The IRS instructions for Form 982 can be too sparse and too broad – go figure. The last page of Form 982 instructions show the IRS estimated time required for completion. That gives you an idea of the tax reporting requirements for cancelled debt. I used to think the IRS instructions were intentionally vague. But now I think the Form 982 instructions are the best that can be done. But note most insolvency CPAs use subscription databases instead of the Form 982 instructions. IRS terminology, coupled with an odd technical writing style, make the Form 982 instructions hard to read, even for an insolvency CPA.

For example, many issues with rental property foreclosures aren’t covered in the IRS instructions for Form 982. You’d need to file Form 4797. The Form 4797 instructions don’t cover prior disallowed passive losses. You need the Form 8582 instructions for that. You’d need to understand depreciation recapture. Things get complex quickly.

Dealing with Credit Card Companies

I don’t deal with credit card companies unless there’s a tax issue involved. See the cancelled credit debt tax strategy section below.

Here’s few issues cancelled credit card debt clients have shared with me over the years.

  • Stop paying the credit card companies. It can take several months of non-payment for them to get serious about negotiating.
  • Prepare for months of disheartening phone calls. These include threats to sue.
  • Continually mention you can’t pay.
  • Document every contact.
  • Some credit card negotiators say never admit the debt is yours.
  • Offer a cash settlement if possible, usually at the end of the fourth or fifth month.
  • Never give them additional information.
  • Mention potential bankruptcy. Do your homework on what that means to the credit card company. If they’ll get $10,000 through bankruptcy, an offer of $18,000 now seems attractive.

S Corporation cancelled debt

Tax reporting requirements for cancelled debt on Form 1099-C vary and depend on what type of entity the cancelled credit card is for. Just as an example, S Corporation cancelled debt stays at the Corporate level and doesn’t flow in the shareholder Schedule K-1s. The Form 1120S instructions don’t even mention the line you report S Corporation cancelled debt on – go figure. So while my comments in this post mostly deal with the Form 982 instructions, most the issues occur in the Form 1120S instructions, Form 1065 instructions, etc. too.

Tax problems arising from cancelled debt including federal tax forms 1099-C, Cancellation of Debt, and 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

Your credit score will plummet. You essentially have all the post settlement credit consequences as going bankrupt.

“Some folks don’t realize cancelled credit card debt incurs tax problems. I routinely amend prior tax returns for folks who paid  full taxes on the amount listed in Box 2 of Form 1099-C. I look to see if I’m cost efficient. But generally I can reduce or eliminate your taxable income due to cancelled credit card debt.”
– Gary Bode, cancelled debt CPA tax accountant

Eventually you’ll receive federal tax Form 1099-C. The amount of cancelled credit card debt appears in Box 2. Check that number carefully. At this point you’ll owe tax on the amount in Box 2. I know that seems unfair. I ballpark the tax due at 25-30% of 1099-C’s Box 2. So $10,000 of debt cancellation can mean $2,500-3,000 of tax liability. Ouch.

The additional interest in Box 3 of Form 1099-C isn’t a factor unless you could have deducted it.  I deal with business cancelled debt too and Box 3 factors in with those circumstances. Box 3 would be an issue in S Corporation cancelled debt. But Box 3 is irrelevant to personal credit card debt.

But some or all of that cancelled credit card debt from Form 1099-C might be excluded from taxable income, by using federal tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). The name alone scares folks. But the Insolvency provision of Form 982 is the only way to exclude cancelled credit card debt from taxable income in 2016. Insolvency for IRS purposes doesn’t mean bankruptcy.

The Form 1099-C date is crucial. The bank often defaults to 12/31. But if the credit card cancelled debt forgiveness occurred on 2/1 you might have less insolvency on 12/31. So I often challenge the 1099-C date. So that’s another example of the Form 982 instruction problems.

Cash Flow with Credit Card Cancellation of Debt

  • Generally the credit card companies require a cash settlement. But I hear they might take that in installment payments.
  • You’ll have an IRS tax problem that might require payment of 25-30% on the amount listed in 1099-Cs Box 2.
  • Your insolvency CPA generally can exclude some or all the Form 1099-C cancelled credit card debt from becoming taxable income.
  • You may have State taxes due from cancelled credit card debt.

Tax Strategy for Cancelled Credit Card Debt

Have as few assets as possible when finalizing the credit card cancelled debt settlement. Why? Being insolvent by the IRS definition can avoid cancelled credit card becoming taxable income on Form 982. Since you can control the Form 1099-C triggering event, you have some tax positioning strategies available. Folks engage me to help with that. No one wants to pay any tax they don’t have to. And it’s legal to manage your affairs to legitimately reduce and optimize your tax circumstances.

 I’m an Insolvency CPA who deals with all types of cancelled debt from federal tax Form 1099-C and Form 982. If you’re intimidated by the Form 982 instructions, and don’t have a local insolvency CPA well versed in cancelled debt consider calling me for a free consult at (910) 399-2705. The CPA license is national and our virtual office makes distance irrelevant. (910) 399 2705.

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35 comments to Insolvency CPA discusses tax problems with Credit Card Cancelled of Debt | federal 2015 tax form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes | Form 982 instructions

  • Tim Randall

    IRS says I owe them for a canceled debt of my ex-wifes. I have never received any form 1099-c, nor any documentation regarding debt from credit company. I have called credit company and requested documentation from them, but was told they couldn’t send me anything since I claim to not owe the debt and they show nothing in regards to me in their system. So now what do I do? Do I just file for the insolvency? I don’t own anything of value, am currently unemployed and about to be homeless.

    • Well Tim, if there are no other pending cancelled debt tax problems, and if you can completely exclude the cancelled debt via federal tax Form 982 without consequences from the tax attributes, I’d just do that. However if there are consequences I’d fight that. We’ve challenged a case similar to yours and won. Hope that helps.

  • Jerry Miller

    How does it work where you have deducted business expenses charged on a creditcard and then file bankruptcy? Are the expenses still deductable?

    • Hi Jerry: Lots of folks pay business expenses with a personal credit card. I suggest documenting everything. So I don’t see any problem here unless you reconstruct expenses after the bankruptcy. Proactive is best. Of course talk to your bankruptcy attorney.

      • Jerry Miller

        I understand that it is normally deducted but that is assuming the credit card bill is eventually paid off. My question concerns where the debt is discharged in bankruptcy. Do the “tax attribution” rules on debt forgiveness come into play thus making the expenses non-deductable since the expenses are never paid.


  • Jerry Miller

    How does it work where you deduct business expenses charged on a credit card and then file bankruptcy and not payoff the credit card?

  • marianne

    I filed chap 7 for credit card debts. My lawyer told me that I shouldn’t be getting any 1099 forms. Do I still do a 982 form? 2013 taxes.

  • Therese

    I received a 1099c from Chase for discharged credit card debt. The credit card was in my name alone. I have been unemployed for several years. I am married and file a joint tax return. Can I personally claim insolvency?

    • Hi Therese. I think your asking if it’s better to file separate tax returns instead of a joint return in hopes of excluding more discharged credit card debt? Well that depends on the State. CPAs seldom recommend filing separate. However with cancelled debt I always prepare separate returns (when possible) and a joint return to see what works best for the client. Hope that helps.

  • Harris

    “I received a 1099c from Chase for discharged credit card debt. The credit card was in my name alone. I have been unemployed for several years. I am married and file a joint tax return. Can I personally claim insolvency?”

    I am in the same situation and live in a common law state. The house is in my spouse’s name as well as the car, etc. All of the checking and savings accounts are in my spouse’s name as that is who the money was earned by and the discharged debt is a result of my actions.

    I am literally insolvent and but cannot have an additional 25K in income added to spouse’s w2 as that will cause a refund to turn into a big payment situation.

    To file separate causes a HUGE payment situation on my spouse’s return where it would normally be a refund.


    • Hi Jay. Well I’d suggest seeing what the result of a joint return would be. Maybe the Form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes, solves your problem If not, then start looking for other angles. There are ways to perhaps “protect” your spouse from your tax consequence even if filing jointly. Hope that helps.

  • Jacob

    Hi Gary
    Maybe I missed it in reading the list, I have 2 1099-c for credit cards rounding up $10K
    401k through work with a $2k 5 year loan on it paying back monthly
    About %30k in student loans in repayment Paying child support,

    10 year old car, in an apartment no other assets using the 982 will the student loans tip the scale to my favor can the support (auto garnished) be counted? filing single Divorced a few years ago

  • Jason

    Hi Gary,

    I just got a notice from the IRS that I owed 683$ for not reporting a cancelled debt of 4878$ on my 2013 return. I received 1099C in Dec of 2012 and I threw it away. I did the insolvency work sheet and I’m insolvent to the extent of over 30,000$ dollars because of student loans. Should I send the 982 form back with the with the IRS notice marking that I don’t acknowledge the debt and what documentation should I send with it?

    • I’m not sure what your asking here Jason. The IRS will follow up on the 2012 Form 1099-C, Cancellation of Debt. It sounds like you received an IRS Notice CP2000 for 2013? If the 2013 Form 1099-C wasn’t yours, sure I’d battle that with the IRS.

  • Michael

    Hi Gary,

    I entered debt relief program in October and all of the negotiated settlements will occur this year 2014. I haven’t received any 1099-C’s for 2013 but I expect I will a year from now. As I am finishing my taxes for 2013, is there anything I need to prepare for for next year. Would I file a 982 now or not until I receive the 1099’s next year.


  • Eddie

    In a common law state, do I include my spouse’s assets/liabilities for form 982 if I file jointly and both of us are insolvent (both withstudents loans, mortgage,etc)? The auto/repo discharged debt is for $4,000 (filing separately would cost more than the taxable income on the forgiven debt).

  • Kurt

    I received 4 1099C’s from Chase for 4 separate credit cards that they cancelled the debt on in July 2013. I filed for personal Chapter 7 bankruptcy in Dec. 2013, and these accounts were included in that filing. I didn’t receive any other 1099c’s from any other creditors. So when filling out form 982, and checking part 1, box A (discharge due to a title 11 case), what amount do I put in part 2? the total amount of my debt being discharged in the full bankruptcy, or JUST the total of the 4 1099c’s that I received? Also, how do I list this under the Part 2 section of Reduction of Tax attributes? I called the IRS, and they don’t help with these questions anymore…of course.

    • That number is lowest of three separate calculations Kurt. I don’t have info enough info to answer. Publication 4681 has a good example that might help you. There’s a website that provides a comprehensive example of those calculations at form982.com.

  • Kim

    I received a 1099-C for canceled debt for a business credit card that I was the guarantor. My parents own the business. I got the card because of my great credit at the time. I made an arrangement to pay a certain amount back. They sent the 1099-c to the store but in my name only and my ss only. This was a business card. Shouldn’t the business have to show this as income not me personally. The problem is my social security is not linked to the business and I want them to know it was definitely added to the income. What do I do to show them?

    • Well Kim, if you’re listed on any of the past tax returns that might help. The IRS thinks the Form 1099-C, Cancellation of Debt, is Gospel. So it may be difficult to circumvent it being personal. If you can use Form 982 to exclude it from taxable income you might consider doing that.

  • Daniel Ekerman

    I received 2 1099-c for cancelled credit card debt in 2012. I filled out a 982 in 2013 and put that that I was insolvent on the form (which I was due to high student loan debt). Then out of nowhere I get a bill from the IRS saying I owe tax on the cancelled debt? What can I do?

    • Hi Daniel. You probably didn’t include all the documentation the IRS requires. May not be a problem. I can look at that IRS Notice if you like and then talk to you. A copy of the tax return would help as well. If I can help, I will. Fax # 910 401 1026. Please include your contact information.

  • Shinky

    Mr. Bode,
    Regarding interest in pension plan, and 401 K’s as asets in the insolvency worksheet… I am not of retirement age, so do I still include the amounts in my company’s pension plan at the time of the identifiable event (in 1099-C- cancellation of debt ) ? And, if we cannot borrow from our 401Ks, or withdraw without penalties (due to our age), do we still list these as assets in the insolvency worksheet?
    Thank you in advance for your response.

  • Nancy

    Hi Gary,
    I was the president of an S-corp business. We closed the business and I personally claimed Chapt. 13. I included business credit card debit in bankruptcy. One of them sent me a 1099-c. Came in business name and my name under business. Do I need to report this on my personal tax return? The business does not report taxes anymore. Thanks!

  • Steve

    Hello, Very informative pages! Thanks.
    I found your site by searching for examples of the form 982 filled out. I notice you have a link, but it goes to a blank godaddy.com page.

    I am interested in your free consult. Is it best to call you?

    I have received a 1099c and am wondering how I figure up my level of insolvency.
    I had serious financial problems a few years back and quit paying all my bills. SInce then, I have gotten married and have a home (my wife purchased). I have income, but not any money to speak of in the bank. SHe has 401k savings and such at her work. We have only been married a few years.


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