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I am getting a 1099c form (cancellation of debt) and I am on…

I am getting a 1099c...
I am getting a 1099c form (cancellation of debt) and I am on Social Security Disability SSDI. Does this mean my social security SSDI becomes taxable? I will have to pay taxes on the 1099c but I am thinking my social security may be taxable what do you think?
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Answered in 16 minutes by:
9/17/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,881
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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The 1099-C can be excluded from income under a number of exclusions. One who is on SSDI would VERY likely qualify under the "insolvency exclusion."

...

If on the "Date of identifiable event," (box one of the 1099-C), the taxpayer is insolvent, FORM 982 can be used to simply exclude the amount of debt as income from the form 1040 - to the extent of the insolvency.

...

Insolvency exists to the extent liabilities (including the debt that was cancelled) exceed the value of assets.

...

Social Security becoming taxable has to do with whether "Combined income," (combined income being a very specific Social Security term, meaning 1/2 of social security plus other income) is above certain thresholds.

...

No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:

...

  • file a federal tax return as an "individual" and your combined income* is
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.

...

  • file a joint return, and you and your spouse have a combined income* that is
    • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
    • more than $44,000, up to 85 percent of your benefits may be taxable.

...

*Note, again:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your "combined income"

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,881
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
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Customer reply replied 11 months ago
Ok so is my cancelled debt of $48,000 in student loans cause my social security to become taxed then?? half of my ssdi would be $6936.00.

48000 (IF you have to include it) ... again, if you don't have to include becasue you're insolvent it might be zero.

...

Or, lets say your assets are worth 10,000 and this debt is your ONLY debt, so insolvency is 38.000

...

You'd only include 10,000 of the income meaning that your potentially TAXABLE income is 16936.

...

But none of the social security would be taxable because your "combined income" is less than 25,000.

...

So now the only truly TAXABLE income is 10,000.

...

The standard deduction for a single filer is 6350 and the personal exemption is 4050, meaning that (given this example - based on single filing and an assumption about the worth of your assets) you have no tax at all. All income is below the standard deduction and personal exemption.

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Customer reply replied 11 months ago
I heard of IRS 982 but I have small credit card debt Lane (4000.00). So if that is my only debt is my social security taxable?? I am a little confused if you can help me understand if my social security is taxable I would appreciate it based I what I tell you,

Yes, but you have to understand that you include the 48000 AND the 4000 to calculate total liabilities.

...

Then you add up the market value (yard sale value) of all of the things that you own (401(k), house, car, etc) and net that 52,000 and the asset number.

...

If the debt total is larger than the asset total then you are insolvent.

...

you then subtract that number (from the 48000 and THAT's the amount of income that ever finds it way to the tax return)

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Here's a worksheet that can help you see if you're insolvent ... and remember, the 4800 is included as one of the debts

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(sorry for the typo ... the 48,000 is one of the debts - sounds like the 4000 plus the 48000 are the only debts)

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it's whatever THAT amount is (the 48000 less the insolvency amount) that you'd use to see if 1/2 of the social security plus that is less than 25,000.

...

If not, none of the social security is taxable

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Customer reply replied 11 months ago
Ok so social security is taxable Lane that is what I thought. Do I get a tax form for the social security to be entered? So $48000 minus a debt of $4000 would show insolvency. I hope I got this right.

No ... your ASSETS (car, furniture, 401(k) plan, etc.,) MINUS the 52000 (the 48000 of debt you had before cancellation plus the 4000) tells you the amount of insolvency.

...

Tell me what you'd estimate the value of all your assets to be, and lets go from there.

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Customer reply replied 11 months ago
Computer $500 Clothes $300 TV $500 thats all my assets Lane.

OK, so the insolvency is 52000 - (500 + 300 + 500) = 50700

...

50,700 is more than 48000 so NONE of the 48000 is included in income.

...

This means that NONE of your social security is taxable.

...

You'll have to FILE to show the form 982 to Answer that 1099-C, but your tax liability will be zero

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Customer reply replied 11 months ago
You can use the student loan debt in the insolvency form you showed me? I thought you couldn't use the 1099c amount in insolvency?? Wow!

Yes, that's why I made the point about the date on the 1099-C.

...

It's your debts on the day BEFORE the debt is forgiven that is used to calculate insolvency or this purpose.

...

Note what it says on that cancellation worksheet I gave you: "I. Total liabilities immediately before the cancellation..."

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Customer reply replied 11 months ago
I LOVE THIS SITE! Thank You Lane! I did not know you could use that 1099c amount. So that is what the IRS worksheet says to your debt before the cancellation??

That's right. Insolvency is a "point in time measurement." And the point in time that's measured for this purpose, in the tax code, is the extent of your insolvency on the day BEFORE the debt was cancelled.

...

Glad to help.

...

If you’d like to work with me again here at JustAnswer, just say "For Lane," at the beginning of your question (OR you can go to your questions page for reviewing questions and choose an option to make me a preferred expert)

..

Thanks again,

Lane

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Customer reply replied 11 months ago
For Lane. Lane my 1099c form doesn't come till 2021 is that gonna hurt me??

Likely not. You'll just perform the same calculation we did using 2021 tax year numbers.

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Customer reply replied 11 months ago
If the debt isn't there in 2021 but was present in 2017 if you get what I am saying?? Now I am worried again.

There will be a date on the 1099-C (box 1) See this: https://www.irs.gov/pub/irs-pdf/f1099c.pdf

...

THAT is the date that the debt is forgiven, not before. They MUST send the 1099-C for the tax year that the debt is forgiven. That's when the "income" happens.

...

The debt will be there UNTIL the debt is cancelled, and the 1099-C is sent for THAt tax year. You're fine here

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Customer reply replied 11 months ago
Oh so the loans have not been officially cancelled until the year of the form likely when they notify the IRS right?

That's right. They cannot send the form UNTIL the tax year they cancel.

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Customer reply replied 11 months ago
what kind of proof do you need to show the IRS how much debt you have? Is the worksheet what they go by or will I have to print them out stuff?
Customer reply replied 11 months ago
Thanks for your time Lane and if I think of any other question I will let you know. I am so happy now I was so worried before.

You simply file the 982 with the return for the year you get the 1099-C. Keep the worksheet for your records in the event you were ever audited.

...

This scenarios is pretty common however. No audit triggers here. But even if you were, you'd be fine here. Very straightforward.

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Customer reply replied 11 months ago
For Lane what if interest accrues until they send the 1099c? This is my last question for you. Do I count that in with the insolvency worksheet?

That would only help your case. The debt that's finally forgiven will be a larger number.

...

SO unless you add assets faster that that, the insolvency will be even larger.

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Customer reply replied 11 months ago
You are the best! Thanks for your help! =).
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