What is a 1099a and a 1099c? 1099c and 1099a tax forms are beginning to show up in the mail if you have debt problems or foreclosure. This past week I had three clients call to ask what to do with them. Here’s the answer.
A 1099 is an information form sent to the IRS. All it does is tell the IRS about a transaction which might have income tax ramifications for you. The 1099a tells them that you abandoned a secured debt. Most commonly it involves a home or other real estate you left. The 1099a tells the IRS that you walked out on a debt that the creditor is writing off.
Similarly a 1099c tells the IRS that a creditor canceled a debt. This can be a credit card bill they can’t collect, a car loan repo deficiency, or a mortgage foreclosure deficiency your bank has decided not to go after. The creditor wants to write off the canceled debt.
Notice the common thread? It all has to do with the creditor writing off a bad debt. Basic tax policy says that when an entity deducts or writes off something another has to include it as income. Forgiveness of debt has always been an income event in the tax code. What this all boils down to is that for the creditor to get a tax deduction for your bad debt, you have to pay income tax on tens of thousands of dollars of income of which you haven’t seen a dime and never will.
What exactly does the 1099c or the 1099c do to you? In a nutshell it raises your tax bracket. That means you pay more tax not just on the forgiven or abandoned debt, but you pay a higher percentage on the money you actually did receive. it is a penalty on all your income so a corporation can get a write off.
There is one way that as a consumer you can combat the 1099a or the 1099c. That is with Form 982. This is a form you file with your tax return that sets forth reasons that these informational documents do not raise your income and tax bracket.
Form 982 sets out three reasons that your income should not be increased by canceled or abandoned debt:
- The debt is discharged in a Title 11 proceeding which addresses the obligation. Bankruptcy is a title 11 proceeding. If you file bankruptcy on the creditor the 1099a or 1099c will not apply to you.
- You are insolvent. This is a tough one that will require you to go through a long form personal financial analysis. You must show that the value of your assets is less the amount you owe. For this calculation exempt retirement assets are included on the asset side. Add in your pension and you are suddenly solvent.
- Congress has extended exclusion from income through 2013 if the sum on the informational return is due to abandoned or canceled debt from qualified mortgage on your principal residence.
If you have no personal liability for the debt you will need to have the issuer of the 1099 correct it with the IRS.
The bottom line is that if you receive a 1099a, or a 1099c you need to file Form 982 with your tax return to tell the IRS the sum should be excluded from your income.