What is that mystery form?
If you borrowed money that your lender says you no longer have to repay, you may have received a tax information statement you’ve never seen before. Form 1099-C, which lenders send to you and to the IRS, shows the amount of the cancelled debt — an amount that may be taxable income to you.
Or maybe not, depending on the type of debt cancelled.
For instance, under present federal law, debt forgiven on loan proceeds you used to buy, build, or improve your main residence (up to a maximum of $2 million) is generally not taxable. That’s also true when the forgiveness involves debt you incurred to refinance a loan used for those purposes.
So what if you’re sure you’re not going to owe tax, since the forgiven debt is a result of a foreclosure or mortgage restructuring on your home? Do you need to report anything?
In most cases, the answer is yes. Why? One reason: Though certain cancelled debt can be excluded from income, the exclusion is not automatic. You have to attach Form 982 to your federal income tax return to claim the tax relief and to show the amount you can exclude.
In addition to mortgage debt relief, you may qualify for other exceptions that make the cancelled debt reported on Form 1099-C nontaxable, such as insolvency or a cancellation resulting from nonrecourse debt.
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