Report your cancelled debt the year it's cancelled or when you receive a 1099-C in the mail. If you don't qualify for any exceptions on cancellation of debt (COD) income, you must report it on your tax return. (However, if you do qualify for an exception, be sure to use IRS Form 982 to report the exception.)
List your COD income on the "other income" line of your return or on Schedule C if your income relates to a sole proprietorship business. Many tax professionals advise just going ahead and reporting COD income, whether you receive a 1099-C or not. That way, if you receive a 1099-C in the future, you can advise the IRS you already reported the income.
You may have some questions once you receive your 1099-C, so here's a mini-FAQ to get you started.
What if you receive a 1099-C for a debt that your ex was supposed to pay? In a case like this, creditors issue 1099-Cs to both people for joint cancelled debts. You should check state law and with a tax professional to find out how much you need to actually pay. If you receive a 1099-C for a cancelled debt that is decades old, what do you do? As creditors are supposed to send out the form after trying to collect on a debt for three years, you will have to provide an explanation to the IRS as to why you believe the 1099-C should not have been filed.
What if you disagree with the amount listed on the 1099-C? If you receive a 1099-C that you feel is in error, contact the lender immediately to make corrections.
If you receive a 1099-C, does that mean you no longer owe the debt? That depends. If you received the form because you worked out a settlement with your creditor, then you no longer owe the debt. But if your creditor filed because they haven't been able to collect for three years and simply haven't recently attempted to collect, you may still be liable for the debt. Check your state's statute of limitations.
For more about tax returns and deductions, check out the links on the next page.