Form 1099-C or Cancellation of Debt

You most likely received Form 1099-C because a lender (e.g. government agency or credit agency) has canceled, discharged, or forgiven a debt of $600 or more that you previously owed. In most cases, if a creditor has cancelled or forgiven your debt, you are required to report the cancelled debt amount on your income tax return, even if it is less than $600. A copy of Form 1099-C is also sent to the IRS.

The terms “forgiveness,” “cancellation,” and “discharge” generally mean the same thing; for example, student loan forgiveness is canceled debt and is considered taxable income.

Cancellation of debt is generally reported on Form 1040, Schedule 1, Line 8c. When filing your return, use the amount in Box 2 of Form 1099.

eFile instructions:

How to add Form 1099-C to your account | How to file with 1099-A

Is Debt Forgiveness Taxable?

There are cases, however, when cancellation of debt should be reported elsewhere or not reported at all; bankruptcy and insolvency might not require you to report cancellation of debt or you may be exempt from reporting the cancellation of debt) See our detailed overview of IRS Publication 4681 regarding Canceled Debts, Foreclosures, Repossessions and Abandonments.

How to Not Pay Taxes on Loan Forgiveness?

There are certain ways to not count cancelled debt as income based on certain situations.

Insolvency: If you are insolvent (your liabilities exceed your assets) at the time the debt is canceled, you might be able to exclude some or all of the canceled debt from your taxable income.
Bankruptcy: Debts discharged through bankruptcy are generally not considered taxable income.
Qualified Principal Residence Indebtedness: For certain periods, there have been provisions allowing taxpayers to exclude forgiven mortgage debt on their primary residence from taxable income. This has varied over the years, so it's important to check the current rules.
Certain Student Loans: Some student loan forgiveness programs, especially those for public service workers, may also be excluded from taxable income.
Amounts canceled as inheritance, gifts, etc.
Qualified home/property purchase price reduction given by the seller of property to the buyer.

File Form 982 to report the exclusion of income or cancellation of debt, including basis reduction for property.

You might also be able to exclude the cancellation of debt from income under the insolvency exclusion (e.g. you are insolvent immediately before the debt is cancelled) if the following apply:

The home you own is used as your main home and the debt was secured by your home
The debt is acquisition indebtedness is debt incurred to buy, build, or improve the home

The eFile Tax App will guide you through the process on where to enter the amount reported on Box 2, and the app will then report the amount on your tax return.

Frequently Asked Questions

Is forgiven debt always taxable?

Generally, yes. The IRS treats forgiven debt as taxable income. However, there are exceptions based on insolvency, bankruptcy, certain student loan forgiveness programs, and qualified principal residence indebtedness.

How do I determine if I am insolvent?

To determine insolvency, compare the total value of your assets to your total liabilities. If your liabilities exceed your assets, you are considered insolvent. You can exclude canceled debt from taxable income up to the amount of insolvency.

What if I don't receive a Form 1099-C?

You are still required to report canceled debt even if you don’t receive a Form 1099-C. Contact the lender to request a copy of the form and ensure you include the canceled debt amount in your tax return. The IRS also receives a copy of this form.

What should I do if I received a Form 1099-C but disagree with the amount reported?

Contact the lender to resolve discrepancies. If you cannot resolve the issue, report the amount you believe is correct and provide an explanation on your tax return. Keep records of all correspondence and documentation related to the disputed amount.

How do I report forgiven debt if I am insolvent?

File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with your tax return - FileIT. On this form, you will indicate the amount of canceled debt excluded from income due to insolvency and provide details about your financial situation.

What if I filed for bankruptcy?

Debts discharged through bankruptcy are generally not taxable. You should retain documentation of the bankruptcy discharge. You don’t need to report these debts as income, but keep records in case of future questions from the IRS.

Is forgiven mortgage debt on a primary residence taxable?

Historically, certain provisions like the Mortgage Forgiveness Debt Relief Act allowed exclusion of forgiven mortgage debt from taxable income, but these provisions have expired and been extended several times. Check the current tax year rules and see more details on mortgages and taxes.

Are forgiven student loans taxable?

Some student loan forgiveness programs, like Public Service Loan Forgiveness (PSLF), are not taxable. However, other forgiveness programs or amounts forgiven under income-driven repayment plans may be subject to tax. See more details on students and taxes.

What if I later receive a reinstatement of forgiven debt?

If a canceled debt is later reinstated or if the cancellation is reversed, you may need to report it as income in the year of reinstatement. Adjust your tax return accordingly and keep records of the reinstatement.

How does forgiven debt affect my state taxes?

State tax treatment of forgiven debt can vary; some states follow federal rules, while others have different provisions. Check with your state tax authority or a tax professional familiar with state tax laws for guidance.

What documentation should I keep related to forgiven debt?

Maintain records of all documents related to the canceled debt, including Form 1099-C, bankruptcy discharge papers, and any correspondence with lenders. This documentation will be important if you need to provide proof of exclusion or resolve any issues with the IRS.

Can I avoid paying taxes on forgiven debt by negotiating with the lender?

You might be able to negotiate with the lender to reduce the amount of debt forgiven or to make other arrangements that could impact the tax implications. However, any forgiveness or settlement is still generally subject to tax unless an exception applies.

Generally, if an identifiable event has occurred but the debt was not actually cancelled or forgiven, then include the cancelled debt amount on your income tax return in the year that it is actually discharged, unless an exception or exclusion applies to you in that year.

Learn more about Cancellation of Debt or search publications and forms for other tax years.

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