Written by a TurboTax Expert • Reviewed by a TurboTax CPAUpdated for Tax Year 2023 • May 6, 2024 11:04 AM
OVERVIEW
In most situations, if you receive a Form 1099-C from a lender after negotiating a debt cancellation with them, you'll have to report the amount on that form to the Internal Revenue Service as taxable income. Certain exceptions do apply.
Key Takeaways
- According to the IRS, nearly any debt you owe that is cancelled, forgiven, or discharged becomes taxable income to you.
- In most situations, if you receive a Form 1099-C, "Cancellation of Debt," from the lender that forgave the debt, you'll have to report the amount of cancelled debt on your tax return as taxable income.
- If your debt was discharged in a Title 11 bankruptcy proceeding, such as a Chapter 7 or Chapter 13 case, you're not responsible for taxes on that debt.
- If you can demonstrate to the IRS that you were insolvent at the time the debt was cancelled, you can similarly avoid taxes on that debt.
Cancelled debt
If your debt has gotten so large you can no longer afford to pay it, negotiating a debt cancellation with your lender might be just what you need in order to get by. Unfortunately, your next challenge might be a huge tax bill. In most situations, if you receive a Form 1099-C from a lender, you'll have to report the amount of cancelled debt on your tax return as taxable income. Certain exceptions do apply.
How the IRS classifies cancelled debt
You might consider it unfair that a debt you successfully cancel or negotiate away comes back to haunt you as taxable income. However, the IRS classifies cancelled debt as income because you received a benefit without paying for it.
When you first borrow money, you don't have to pay tax on the money you receive because you are bound by a contract to pay it back. If that contract gets cancelled without you paying the money back, the money is yours to do with as you please. Since you essentially received money for free, the cancellation of your obligation to pay it back usually makes it taxable income.
Form 1099-C
According to the IRS, nearly any debt you owe that is canceled, forgiven or discharged becomes taxable income to you. You should receive a Form 1099-C, "Cancellation of Debt," from the lender that forgave the debt. Common examples of when you might receive a Form 1099-C include charge-off of a credit card balance, repossession, foreclosure, return of property to a lender, abandonment of property, or the modification of a loan on your principal residence.
TurboTax Tip:
The Mortgage Forgiveness Debt Relief Act allows you to exclude up to $2 million in forgiven mortgage debt if you were married and filing jointly—up to $1 million for other filing statuses—for tax years 2007–2020. The Consolidated Appropriations Act of 2020 extends the exclusion of canceled qualified mortgage debt up to $750,000 for tax years 2021–2025.
Mortgage forgiveness debt relief act
Due to the magnitude of the real estate market collapse that began in 2007, Congress passed the Mortgage Forgiveness Debt Relief Act. For calendar years 2007 through 2020, you can exclude up to $2 million in forgiven mortgage debt if you were married and filing jointly—up to $1 million for other filing statuses. This also applies to debt that was discharged in 2021 provided that there was a written agreement entered into in 2020.This exclusion also applies to mortgage debt forgiven through a mortgage restructuring or in connection with a foreclosure.
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the COVID-19 coronavirus pandemic. The CAA extends the exclusion of cancelled qualified mortgage debt from income for tax years 2021 through 2025. However, the maximum amount of excluded forgiven debt is limited to $750,000.
Bankruptcy and insolvency
Even if you receive a Form 1099-C from a lender, you still may be able to avoid taxation on the forgiveness of a debt. If your debt was discharged in a Title 11 bankruptcy proceeding, such as a Chapter 7 or Chapter 13 case, you're not responsible for taxes on that debt.
If you can demonstrate to the IRS that you were insolvent at the time the debt was cancelled, you can similarly avoid taxes on that debt. Certain other types of debt, including qualified farm indebtedness and qualified real property business indebtedness, can also avoid taxation in the event of cancellation.
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FAQs
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.
Do you have to file a 1099-C cancellation of debt? ›
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.
How do I report cancellation of debt on my tax return? ›
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.
Is debt cancellation considered taxable income? ›
In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable. If taxable, you must report the canceled debt on your tax return for the year in which the cancellation occurred.
How badly does a 1099-C affect my taxes? ›
Cancelled debt
Unfortunately, your next challenge might be a huge tax bill. In most situations, if you receive a Form 1099-C from a lender, you'll have to report the amount of cancelled debt on your tax return as taxable income.
Do I have to pay taxes on loan forgiveness? ›
According to the IRS, student loan amounts forgiven under PSLF are not considered income for tax purposes. Learn more about the PSLF process. You won't be taxed by the federal government, but your state may tax you. Any debt forgiven as a result of PSLF won't create a federal tax liability for you.
How to remove cancelled debt from credit report? ›
You must file a dispute in writing with each of the three bureaus separately and include supporting documents. The credit bureau will investigate, and the negative item must either be confirmed or corrected. Note that an item may be updated but not entirely removed from your credit report.
How to prove insolvency for 1099-C? ›
Send a simple letter to the IRS with a completed IRS form 982. he form is located at the IRS' website here: https://www.irs.gov/pub/irs-pdf/f982.pdf In the letter you will include a Statement of Assets and Liabilities, which can be handwritten on a piece of notebook paper if necessary.
Where to put 1099-C on TurboTax? ›
To enter your 1099-C:
- Open or continue your return.
- Search for 1099-C or 1099C (lowercase also works).
- Select the Jump to link at the top of the search results.
- On the Tell us about your canceled debt screen, select the type of canceled debt (main home or other) and then select Continue.
Any interest that was owed on the debt that is cancelled must also be reported as gross income unless the interest would have been deductible had the taxpayer paid the interest.
If the lender also canceled all or part of the remaining amount of the loan, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case or you were insolvent immediately before the cancellation.
Does the IRS forgive debt after 10 years? ›
Yes, after 10 years, the IRS forgives tax debt.
However, it is important to note that there are certain circ*mstances, such as bankruptcy or certain collection activities, which may extend the statute of limitations.
Will you get a 1099-C for student loan forgiveness? ›
Background: Student Loan Forgiveness Can Be Taxable
A lender would issue the debtor a Form 1099-C, which is a tax form showing the amount of the cancelled or forgiven debt. The form is issued during tax season for the prior year when the cancellation event occurred.
How much tax will I pay on a 1099-C? ›
That depends on your overall taxable income. Your income, including amounts listed on your 1099-Cs, gets taxed at the normal progressive rate, which ranges from 10% to 37%. How much tax you will owe depends on your tax bracket, filing status, credits, and deductions.
Can a creditor still collect after issuing a 1099-C? ›
In this event, the account is still delinquent, but the debt hasn't been forgiven, so the lender may still try to collect. The IRS amended the rule later that year, so creditors are no longer expected to file a 1099-C just because it's 36 months past due. But it is possible for it to still happen.
What happens if I forgot to add 1099-C on my taxes? ›
Often, the IRS will recalculate your tax return by including the missing income and determining the amount of tax they think that you owe. This can include penalties and interest. If you realize that you didn't include some income on your tax return, you can file an amended return that includes the missing information.
What if I forgot my 1099C on my taxes? ›
If you catch missing information on your tax return before the IRS does, then you should file an amended tax return. You'll use Form 1040-X, Amended U.S. Individual Tax Return. You should provide a clear explanation for the reason that you are amending your return.
