Lexington, SC asked in Tax Law for South Carolina

Q: What are ways to avoid having to pay tax upon the amount of debt written off or forgiven when you receive a 1099-C?

Related Topics:
1 Lawyer Answer
James L. Arrasmith
James L. Arrasmith pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Tax Law Lawyer
  • Sacramento, CA

A: When you receive a Form 1099-C for cancellation of debt, it typically means you need to report this amount as income on your tax return, potentially increasing your tax liability. However, there are several strategies that may help you avoid or minimize the tax impact of forgiven debt.

Firstly, if you were insolvent immediately before the debt was forgiven—that is, your total debts exceeded the fair market value of your assets—you may not have to include all or part of the forgiven debt in your income. The IRS Form 982 can be used to declare insolvency and exclude the forgiven debt from your income.

Secondly, if the debt forgiven was related to a qualified principal residence, certain exclusions might apply, especially if the loan was used to buy, build, or substantially improve your principal residence.

Thirdly, if the debt was discharged in a Title 11 bankruptcy proceeding, then it's generally not considered taxable income.

It's also worth noting that for certain types of student loans, if the debt is forgiven after you've worked for a certain period of time in a specific profession, this forgiveness may not be considered taxable income.

Given these complexities, consulting with a tax professional can be invaluable. They can help you navigate the specific rules and paperwork required to potentially reduce or eliminate the tax burden associated with forgiven debt.

Justia Ask a Lawyer is a forum for consumers to get answers to basic legal questions. Any information sent through Justia Ask a Lawyer is not secure and is done so on a non-confidential basis only.

The use of this website to ask questions or receive answers does not create an attorney–client relationship between you and Justia, or between you and any attorney who receives your information or responds to your questions, nor is it intended to create such a relationship. Additionally, no responses on this forum constitute legal advice, which must be tailored to the specific circumstances of each case. You should not act upon information provided in Justia Ask a Lawyer without seeking professional counsel from an attorney admitted or authorized to practice in your jurisdiction. Justia assumes no responsibility to any person who relies on information contained on or received through this site and disclaims all liability in respect to such information.

Justia cannot guarantee that the information on this website (including any legal information provided by an attorney through this service) is accurate, complete, or up-to-date. While we intend to make every attempt to keep the information on this site current, the owners of and contributors to this site make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained in or linked to from this site.