If you have more than $600 of taxable debt forgiven, you’ll receive a 1099-C Cancellation of Debt form from the lender. This form is a tax document that will help you determine whether you owe debt forgiveness taxes.
A lot of people don’t even know the 1099-C Cancellation of Debt form exists, so it can be a shock to receive one. Let’s take a close look at what Form 1099-C is, what you should do when you receive a 1099-C and how you can determine whether your debt is excluded from debt settlement taxes.
What is a 1099-C form?
If you have a taxable debt of $600 or more canceled by the lender, that lender is required to file Form 1099-C with the IRS. The lender is also required to send you a copy of the 1099-C Cancellation of Debt form so you can use it when you file your annual taxes. If the debt on your 1099-C Cancellation of Debt form does not fall into one of the IRS’s excluded categories, you might owe debt forgiveness tax.
What does cancellation of debt mean?
Cancellation of debt is exactly what it sounds like—you had a debt, and it was canceled. If you negotiate a debt settlement on your credit cards, for example, you might end up having some of your credit card debt forgiven. That counts as cancellation of debt, and you should expect a 1099-C cancellation of debt form in the mail.
You might also have debts canceled if your student loans are forgiven, if your mortgage is modified or even if your home goes into foreclosure. All of these canceled debts could generate a 1099-C form—which means you might have to pay debt forgiveness tax or debt settlement tax on your canceled debt.
When do you have to pay debt forgiveness taxes?
In most cases, you have to report canceled debt as ordinary income on your federal tax return—even if the debt was less than $600, and even if you never received a Form 1099-C. List your canceled debt on your Form 1040 under Schedule 1: Other Income. Your canceled debt will become part of your taxable income, which means you might owe debt forgiveness taxes on your canceled debt.
That said, you aren’t really paying a separate tax on your canceled debt. The amount of debt that was canceled is treated as income and rolled into your overall tax return. The tax you owe will depend on your income, adjustments, deductions and credits—not to mention the tax money you’ve already asked the IRS to withhold from your paychecks.
This is why you won’t be able to find a “1099-C tax calculator” online. It’s not a separate tax. It’s simply included as part of your annual income and rolled into your overall tax burden.
You could have a debt canceled, report your canceled debt as ordinary income on your taxes and still get a tax refund. However, if your canceled debt significantly increases your income, you’re probably going to owe a little more tax than usual. Be prepared, and consider putting a little extra money in your emergency fund to cover the cost.
What to do when you receive a 1099-C form
When you receive a 1099-C form, file it somewhere safe. You’re going to need it when you start filing your taxes. If you work with a CPA or tax preparer, make sure they are aware that you have received a 1099-C form. Give them a copy as part of your tax preparation.
If you believe your canceled debt should be excluded from your taxable income, you will need to file Form 982 with your tax return. Form 982 lets the IRS know why your canceled debt should be excluded from debt forgiveness taxes, so you don’t end up paying more tax than you actually owe.If you have questions about your 1099-C form, or are curious whether you should file Form 982, talk to a CPA or qualified tax professional.
Exclusions to debt forgiveness taxes
The IRS has a number of 1099 debt forgiveness exclusions—which means if your debt falls into an excepted or excluded category, you do not have to include it as ordinary income on your tax return.
Some common exceptions to the debt cancellation rule include:
- Amounts canceled as gifts, bequests, devises or inheritances
- Certain qualified student loans
- Certain other education loan repayment or loan forgiveness programs to help provide health services in certain areas
- Canceled debt that would be deductible if you paid it
- A qualified purchase price reduction on a property
- Any amounts discharged from certain federal, private or educational student loans
Here are some common debts that the IRS states can be excluded from your gross income:
- Debt canceled in a Title 11 bankruptcy case
- Debt canceled to the extent insolvent
- Cancellation of qualified farm/residential property indebtedness
- Cancellation of qualified real property business indebtedness
- Cancellation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2026
FAQs on cancellation of debt taxes
What if you don’t receive a 1099-C?
If you know you have a canceled debt of over $600 but you didn’t receive a 1099-C, it’s still your responsibility to include the forgiven debt on your federal tax return. Just because your lender failed to file a 1099-C doesn’t mean you can get away with not reporting your debt on your taxes. If you know the exact amount of your forgiven debt, you can include it on Form 1040. If you are unsure about how much of your debt was forgiven, you’ll need to contact your creditor.
What if you lose your 1099-C?
If you lose your Form 1099-C, you can contact your lender and ask for another copy.
What if you forget to include your 1099-C on your taxes?
If you have a 1099-C form but did not include the forgiven debt as taxable income, you can file an amendment to your tax return. Use Form 1040X, and be prepared to pay any extra tax you might owe.
What if you have a canceled debt that is less than $600?
If you have a canceled debt that is less than $600, you still need to report it as income on your taxes. Include your canceled debt on Form 1040, Schedule 1: Other Income.
What if you’re not sure whether your debt should be excluded from your taxable income?
If you don’t know whether or not to exclude your debt from your taxable income, talk to a CPA or trusted tax professional.
What if you receive a 1099-C form on an old debt?
Although there is a statute of limitations on old debt, there’s no statute of limitations on 1099-C forms—which means that lenders and debt collectors occasionally send out 1099-C forms on very old debts.
If you receive a 1099-C on an old debt, your best option is to contact a CPA or tax professional. They’ll help you determine how to settle the outstanding tax issue. You may be able to qualify for an exemption, you may have to amend an old tax return and you may be able to deal with the 1099-C on your current tax return.
What if your 1099-C form is incorrect?
Sometimes creditors and debt collectors make mistakes. You might receive a 1099-C form for a debt you paid in full. You might also receive a 1099-C form for a debt that was forgiven, but the creditor listed the wrong amount of canceled debt on the form.
If you believe your 1099-C form is incorrect, your first step is to contact your creditor or debt collector. Explain the discrepancy and ask them to file a corrected 1099-C with the IRS (and send you a copy). If that doesn’t work, your next step is to contact the IRS and issue a Form 1099-C Complaint. From there, the IRS will contact the creditor and begin the process of resolving the dispute.
Form 1099-C, the Cancellation of Debt form, is crucial in tax reporting when debt exceeding $600 is forgiven. It's a document submitted to the IRS by lenders and provided to the debtor, highlighting canceled debts subject to potential taxation. This form arises from various debt settlements, such as credit card negotiations, mortgage modifications, student loan forgiveness, or foreclosures. The purpose is to track canceled debts that might result in debt forgiveness taxes.
When a lender cancels $600 or more of debt, they must file Form 1099-C and furnish a copy to the debtor. However, the canceled debt might not always lead to taxation. There are exclusions outlined by the IRS where certain types of canceled debts are not counted as taxable income, like gifts, certain student loans, and debts discharged in bankruptcy or due to insolvency.
Reporting canceled debts on tax returns is essential, even without a received 1099-C, as failure to do so might result in additional taxes or penalties. If debt is excluded from taxable income, Form 982 is necessary to inform the IRS. Consulting a tax professional or CPA becomes vital to navigate these complexities.
Losing a 1099-C doesn’t absolve one from reporting forgiven debt. Contacting the lender for a duplicate copy or estimating the forgiven debt amount helps in accurate tax filing. Additionally, rectifying errors in received 1099-C forms is crucial; disputing incorrect information involves communication with both the creditor and the IRS.
In summary, understanding Form 1099-C and its implications is crucial when dealing with forgiven debts for tax purposes. From recognizing excluded debts to reporting and rectifying errors, staying informed and seeking professional guidance ensures accurate tax filings and prevents potential financial setbacks.
