Why am I getting a 1099-C form?

Around this time of year, 1099-C forms may start to pop up in your mail.  This is a form a creditor sends you when they "forgive" your debt and won't try to collect it any longer.  Often, this happens when you've tried to settle a debt for less than the full balance.  Let's say you had a credit card balance of $5,000, and you agreed to settle it for $2,000.  Then the creditor sends you 1099-C form saying they forgave $3,000 in debt.  According to the IRS, this $3,000 may be income you need to pay taxes on.    Or let's say your house went into foreclosure.  You lost the house, and the bank decided not to come after you for the balance owed on the loan.  According to the IRS, this may also be taxable income.

The most important  thing is not to ignore these forms. The IRS won't, and if you don't report this income, they'll be getting in touch with you.  But it's important to know that forgiveness of debt doesn't always result in a higher tax bill. If your debts were discharged in bankruptcy, you don't pay tax on them. If you were insolvent (you owed creditors more than the value of the stuff you owned), you don't pay tax on it. In some cases, money you lost on your home may not be taxable.  Talk to your tax preparer about whether this is really income to you.  If not, you'll need to file Form 982  with your tax return.  If you usually prepare your own returns, consider hiring a professional this year unless you're very confident you know what you're  doing.