Step-by-Step Guide
Step 1: Identify the Debt Cancellation
Confirm Cancellation: Verify that the taxpayer has indeed cancelled debt, which can include:
Credit card debt
Personal loans
Mortgages
IRS Criteria: Ensure that the cancellation meets IRS criteria for reporting. Generally, any debt of $600 or more that is cancelled must be reported.
Gather Documentation: Collect all relevant documentation related to the cancellation, such as:
Form 1099-C: This form is issued by the lender to report the amount of cancelled debt.
Step 2: Enter Form 1099-C Information
Navigate to 1099-C Section: In TaxWise, go to the section designated for entering 1099-C information.
Generally, data from a Form 1099-C, Cancelled debt (box 2) is reported on Form 1040, line 21 for 2017 and prior.
But for 2018, 2019 and 2020, it is reported on 1040 Schedule 1 Line 8, for 2021 on 1040 Schedule 1 line 8z, using Wkt 7. However, as noted above there are cases where this should be reported elsewhere, or not reported at all.
If you are excluding income due to due to indebtedness reported on 1099-C you may also want to complete Form 982.
Note: Form 982 is informational, and does not flow to any form in the return. It only shows the IRS the amount you have excluded from and income and the reason you excluded the incomeYou can find a list of credits (both refundable and non-refundable) by navigating to Sch 3 Pg 1 and Pg 2
Input Creditor Information:
Creditor's Name: Enter the name of the creditor as it appears on Form 1099-C.
Creditor's Address: Fill in the complete address of the creditor.
Taxpayer Identification Number (TIN): Enter the TIN of the creditor.
Enter Amount of Cancelled Debt: In the appropriate field, input the amount of cancelled debt as reported on Form 1099-C.
Step 3: Report Debt Cancellation as Income
Understanding COD Income: COD income generally needs to be reported as ordinary income unless the taxpayer qualifies for an exclusion or exemption (e.g., insolvency or bankruptcy).
Enter Income in TaxWise:
Navigate to the Income section of the tax return.
Locate the category for “Other Income” or Form 1040, Schedule 1.
Ensure that the COD income is entered correctly in this section.
Step 4: Apply Exceptions or Exclusions
Determine Eligibility for Exclusions: If the taxpayer qualifies for an exclusion (e.g., insolvency), you will need to apply it accordingly.
Use Worksheets or Forms:
If the taxpayer claims an exclusion or exception, such as for a primary residence loan, ensure that the correct form (e.g., Form 982) is filled out and attached to the tax return.
Step 5: Review and File
Final Review: After entering the COD information and any applicable exclusions, conduct a thorough review of the entire return for accuracy. Check for:
Correct entries in all relevant sections.
Proper documentation attached.
Submit the Return: Once you are confident that everything is accurate, submit the return to the IRS, ensuring that the cancellation of debt is reported correctly.