Get those tax forms right.
Summary: Your creditor might have canceled your debt. But the U.S. government isn't going to let you move on just yet. Find out how to report the cancelation of your debt on a 1040.
The one thing that every U.S citizen, green card holder, or U.S employee has in common is death and taxes. No one can escape death, nor taxes (legally). This means that another thing everyone has in common is filling out the IRS 1040 form. This is one of the main official documents that anyone paying U.S taxes must fill out. It is used to file income tax returns and has a variety of different sections to report income and report deductions. Eventually, you will conclude how much you need to pay in tax or the refund that will be paid out to you.
Understanding the purpose of the 1040 form
Using the federal 1040 form allows you to calculate any taxable income, or to receive a return. For example, depending on your lifestyle, income, and method of earning income, there are different tax deductions you can make. Some of these deductions include:
- Mortgage interest
- State and local income taxes/sales taxes,
- Contributions to charity
- Excess medical expenses
Another thing you will need to report on your 1040 form is if you have debts that are canceled.
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Variations of the 1040 form
There are different variations of the 1040 form, which will depend on each individual taxpayer. For example, most taxpayers will use the standard form 1040. This helps to determine how much needs to be paid or refunded. For seniors over 65, the 1040-SR is available. The main difference being it has a larger font and includes a chart.
Form 1040-NR is for non-US citizens without a green card. It is longer than the standard 1040 because it has additional sections. Finally, the form 1040-X is for anyone needing to make changes to their form after already having filed the standard form 1040.
What is a cancellation of debt?
Cancellation of debt can occur if the creditor is unable to collect on a debt, or they give up on doing so. For example, if you own property that has debt on it, cancelation of debt can occur because of foreclosure, repossession, or a voluntary transfer of the property to the lender.
Other reasons may include abandoning the property, or a mortgage modification. If your debt was canceled, forgiven, or discharged for less than the amount you owed, then you are required to pay back this amount as taxable income.
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How to report the cancellation of a debt on a 1040
If you have borrowed money and are required to pay it back, then you are considered to have acquired a debt. Whether you are liable for it, or you own property that has incurred a debt, they are similar situations.
Once your debt is canceled, your creditor may send you a Form 1099-C. This is known as the form to report your Cancellation of Debt. It should show how much debt has been canceled for you, and on which date. You should check this to ensure the information is correct. If the creditor attempts to collect the debt after sending you this form, then they may not have canceled the debt, and you may not have income from it. This is why it is essential to check it thoroughly.
Generally, you are required to report anything taxable as a canceled debt as ordinary income. This should be named an “other income,” as long as the original debt was not business debt. You can do so on one of the following forms:
- Form 1040, U.S. Individual Income Tax Return
- Form 1040-SR, U.S. Tax Return for Seniors
- Form 1040-NR, U.S. Nonresident Alien Income Tax Return
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When debt is not considered canceled
If you need to report canceled debt on your tax return, there is a specific method to do so. There is a reason why you may not need to report it, and this is if the law allows you to exclude it from your income. For example, in some situations, you may have your debt forgiven, or settled for less than what you originally owed. This is usually considered a canceled debt, but there are some situations where it is not, including:
- Gifts, bequests, devises, or inheritances
- Qualified student loans canceled under specific provisions of working for a time in certain professions
- Education loan repayment
- Loan forgiveness programs
- Qualified purchase price reduction is given to someone buying a home
- Student loans discharged due to death of a student
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