Written by a TurboTax Expert • Reviewed by a TurboTax CPAUpdated for Tax Year 2023 • April 11, 2024 5:08 PM
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
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.
Do you have to file a 1099-C cancellation of debt? ›
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.
How do I report cancellation of debt on tax return? ›
In general, you must report any taxable amount of a canceled debt as ordinary income on Form 1040, U.S. Individual Income Tax Return, Form 1040-SR, U.S. Tax Return for Seniors or Form 1040-NR, U.S. Nonresident Alien Income Tax Return (attach Schedule 1 (Form 1040), Additional Income and Adjustments to IncomePDF ) if ...
How badly does a 1099-C affect my taxes? ›
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.
Will you get a 1099-C for student loan forgiveness? ›
"Any student loan forgiveness may trigger a 1099-C whether the forgiveness is taxable or not," said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. And it's still best to include it when you file your taxes.
Does cancellation of debt need to be reported on tax return? ›
Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
What happens if you don't file a 1099c? ›
The creditor that sent you the 1099-C also sent a copy to the IRS. If you don't acknowledge the form and income on your own tax filing, it could raise a red flag. Red flags could result in an audit or having to prove to the IRS later that you didn't owe taxes on that money.
What is the 36 month rule for 1099-C? ›
No Debt Payments for 36 Months No Longer Triggers Debt Cancellation Form 1099-C. Final regulations remove the requirement that certain financial institutions and governmental agencies issue a Form 1099-C, Cancellation of Debt, when a debtor fails to make a payment for 36 months.
Does a 1099-C affect your credit? ›
The event that triggered the 1099-C — unpaid credit card debt, for example, or a foreclosure or short sale of your home, a vehicle repossession or other incident in which you did not pay a debt — almost certainly has been reported on your credit reports. In some sense, then, the damage has already been done.
What happens when you file a cancellation of debt? ›
Cancellation of debt is the forgiveness of debt obligations by a creditor. Debt relief can be achieved through direct negotiations, debt relief programs, or bankruptcy. Canceled debt is generally considered taxable income that must be reported, but there are many exceptions.
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.
What are the rules for 1099-C? ›
Form 1099-C is to be used only for cancellations of debts for which the debtor actually incurred the underlying debt. 2. An identifiable event has occurred. It does not matter whether the actual cancellation is on or before the date of the identifiable event.
How much tax will I pay on cancelled debt? ›
There are no direct taxes on a debt settlement, but if you save $600 or more, you will have to report the savings as income. To continue with the above example, the $2,000 you saved on that credit card debt is taxable income. You report it on your tax return and pay taxes based on your situation.
Will I be taxed on student loan forgiveness? ›
Zoom in: Current tax law treats forgiven or canceled debt as taxable income, though there are some exceptions. If student debt is forgiven, it's treated as if the borrower earned additional income equal to the amount of debt forgiven, according to the independent tax policy nonprofit Tax Foundation.
Do I need a tax form for student 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.
What 1099 is used for debt forgiveness? ›
You will receive a 1099-C Cancellation of Debt form if a lender forgives more than $600 of taxable debt on your behalf. You must include the amount of canceled debt on your federal tax return as a part of your taxable income. There are instances that warrant the exclusion of forgiven debt from your return.
Where do I report 1099-C cancellation of debt on 1040? ›
Lenders or creditors are required to issue Form 1099-C, Cancellation of Debt, if they cancel a debt owed to them of $600 or more. Generally, an individual taxpayer must include all canceled amounts (even if less than $600) on the "Other Income" line of Form 1040.
How do I cancel a 1099-C debt? ›
File Form 1099-C in the year following the calendar year in which the identifiable event occurs. See Exceptions, later. If you cancel a debt before an identifiable event occurs, you may choose to file Form 1099-C for the year of cancellation.
Who must file a 1099-C? ›
File Form 1099-C for each debtor for whom you canceled $600 or more of a debt owed to you if: You are an applicable financial entity. An identifiable event has occurred.
