Cancelled debt (1099-C)
A 1099-C for forgiven credit-card debt. When cancelled debt is taxable income, and how the insolvency exclusion on Form 982 can wipe out most of it.
The taxpayer's facts and source documents are free with an account. No card, nothing to cancel.
Taxpayer facts
Who this is and what their year looked like.
Marcus is single, 38, and works a W-2 job in Reno, Nevada. After a rough couple of years, he settled a credit-card balance for less than he owed, and the bank sent a 1099-C for the forgiven amount.
Right before the debt was cancelled, he owed more than he owned. He kept a list of his debts and the value of what he owned that day.
Source documents
The 3 documents you will prepare the return from: W-2 (Wage and Tax Statement), 1099-C (Cancellation of Debt), Taxpayer's insolvency worksheet (just before the cancellation).
Free with an account
Create a free account to open the taxpayer's facts and every source document. No card, nothing to cancel.
Objectives
What a correct return should capture.
- Report the W-2 wages.
- Recognize that the cancelled credit-card debt (1099-C) is generally taxable as other income on Schedule 1.
- Compute insolvency immediately before the cancellation: total liabilities less total assets at fair market value.
- Apply the insolvency exclusion on Form 982: exclude the cancelled debt up to the insolvency amount, and figure how much remains taxable.
- Report the taxable cancelled debt on Schedule 1, apply the standard deduction, and compute the tax.
- Reconcile withholding to the refund or balance due.
- Note that Nevada has no state income tax.
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
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