1099-C cancellation of debt
Debts, in some cases, debt can be forgiven. If your credit card debt, car loans, student loans, or mortgage is forgiven (or you go into foreclosure), you might get an unexpected tax form – the 1099-C.
In this post, we’ll walk through the definition of a 1099-C, what to do when you get one, cancellation of debt exclusion, and more about the 1099-C form.
What is a 1099-C?
The 1099-C form reports a cancellation of debt; creditors are required to issue Form 1099-C if they cancel a debt of $600 or more. Form 1099-C must be issued when an identifiable event in connection with a cancellation of debt occurs.
Who files a 1099-C?
A lender files a 1099-C with the IRS – and they’ll send you a copy of the form. While you don’t have to file the 1099-C, you should use it to prepare and file your income tax return.
In some cases, your forgiven debt is taxable – and in some it’s not.
When it is taxable nonbusiness debt, you’ll use the copy of the 1099-C to use to report it on Schedule 1 of Form 1040 as other income. But there are exceptions to paying taxes on your cancellation of debt, which we’ll outline below.
Cancellation of debt exclusions
You might be able to exclude the cancellation of debt income if one of these applies:
- You’re insolvent.
- The debt was discharged in bankruptcy.
- The debt was qualified main home indebtedness (applies through 2025).
- The debt was qualified farm indebtedness.
- The debt was qualified real property business indebtedness.
If you can exclude the income, file Form 982 to report the exclusion. You might report other items on Form 982 such as a basis reduction for property.
Under the insolvency exclusion, you can exclude the cancellation of debt from income. You can do this to the extent you’re insolvent immediately before the debt is cancelled. Insolvency is the amount by which your liabilities are more than the fair market value (FMV) of all your assets.
You might be able to exclude the cancellation of debt income if both apply:
- The debt is acquisition indebtedness is debt incurred to buy, build, or improve your home;
- You owned the home and use it as your main home and the debt was secured by your home.
The main home indebtedness exclusion also includes any debt secured by your main home that you used to refinance a mortgage you originally used to buy, build, or substantially improve your main home. Only an amount up to the amount of the old mortgage principal just before the refinancing can qualify.
In addition, the maximum, amount you can treat as qualified debt is acquisition indebtedness up to:
- $750,000 million
- $375,000 if you’re married filing separately
Before 2021, the limit was $2 million ($1 million if married filing separately).
In some cases, cancelled student loan indebtedness may also be excluded from income. Read up on student loan forgiveness.
More help with 1099-C
Receive an IRS 18C letter? Learn more about letter 18C, why you received it, and how to handle it with help from the tax experts at H&R Block.
Do you need to report capital gains or losses associated with an estate? Learn more about Form 1041 Schedule D with help from the tax pros at H&R Block.
Learn about the consequences you may face if you are self-employed and have unfiled returns. Get the facts from the tax experts at H&R Block.
Looking to get a state tax refund this year? Find out how to make changes to state withholdings from the tax experts at H&R Block.