What this line means
The taxable portion of any debt that was cancelled, forgiven, or discharged during the year. When a creditor cancels $600 or more of debt, they report it on Form 1099-C. The cancelled amount is taxable income because you received an economic benefit — money you borrowed but never repaid. Several exceptions can reduce or eliminate the taxable amount.
Does this apply to you?
- You received a Form 1099-C from a creditor for cancelled or forgiven debt
- A credit card company charged off and cancelled a balance you owed
- A lender forgave part of a loan balance through a short sale or debt settlement
- You had student loans discharged (check whether the discharge qualifies for an exclusion)
- You negotiated a reduced payoff on a personal loan, mortgage, or medical debt
Easy to overlook
The insolvency exclusion can eliminate the tax on cancelled debt If your total liabilities exceeded the fair market value of your total assets immediately before the cancellation, you were insolvent. 1 You can exclude cancelled debt from income to the extent of your insolvency. A filer who owes $80,000 in total debts but has only $60,000 in total assets is insolvent by $20,000 and can exclude up to $20,000 of cancelled debt. File Form 982 to claim this exclusion. Many filers pay tax on cancelled debt without realizing they qualified for the insolvency exclusion. General filing pattern — insolvency exclusion missed by eligible filers
Bankruptcy discharges are fully excluded from income Debt cancelled in a Title 11 bankruptcy case is completely excluded from taxable income. 2 You do not report the cancelled amount on this line. File Form 982 and check Box 1a to claim the exclusion. If you received a 1099-C for debt discharged in bankruptcy, the full amount is excludable. IRS Publication 4681 — Canceled Debts and Foreclosures
Watch out for this
Ignoring a 1099-C because the debt is old or you had forgotten about it. Creditors sometimes cancel debt years after the original default, and the 1099-C arrives unexpectedly. The IRS receives a copy and expects you to either report the income or file Form 982 to claim an exclusion. Ignoring the 1099-C triggers an automated notice.
Footnotes
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Insolvency. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩
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IRS Publication 4681, Canceled Debts, Bankruptcy. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩