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How can I pay the taxes for the “income” shown on my 1099-C?

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In a Nutshell

When a creditor forgives debt, you're still not completely off the hook since you'll have to consider the forgiveness income for tax purposes. If you have had $600 or more of debt canceled or forgiven by a creditor during a single year, you can expect to receive a Form 1099-C and to pay taxes on this canceled debt. If you’ve received your 1099-C or you’re evaluating a debt settlement option and want to learn more about debt forgiveness and the 1099-C tax form, keep reading. We’ll help you through this process.

Written by the Upsolve TeamLegally reviewed by Attorney Andrea Wimmer
Updated August 3, 2021

If you have had $600 or more of debt canceled or forgiven by a creditor during a single year, you can expect to receive a Form 1099-C and to pay taxes on this canceled debt. Debt forgiveness or cancellation may happen as a result of a debt settlement agreement, property surrender, or foreclosure-related short sale. 

The Internal Revenue Service (IRS) classifies forgiven debt as income. And as everyone knows, the IRS likes to tax income. If you’ve received your 1099-C or you’re evaluating a debt settlement option and want to learn more about debt forgiveness and the 1099-C tax form, keep reading. We’ll help you through this process. 

Why is debt forgiveness considered taxable income?

The IRS considers forgiven debt to be ordinary income. This classification normally covers wages, tips, salaries, and certain types of interest. But, the income from debt forgiveness is classified under the catchall category of “other” on a filer’s 1040 form. Since forgiven debt is considered income, it’s taxable. Even the accrued interest is taxable if it’s not deductible. Most forms of interest (such as the interest you pay for personal, auto, or credit card loans) are not usually deductible. The amount of interest to be included will be listed on your 1099-C form.

When a creditor forgives a debt, the creditor is essentially paying off that debt. It would be cumbersome and risky for a creditor to send you a check or Venmo you the money to pay off a debt you owe them. But if they did, those funds would be income. Instead, debt forgiveness skips this part of the process, and the canceled debt becomes - essentially - hypothetical income that you have to report on your taxes. Like any other income, the IRS will tax it if it is over a specific amount. 

The 1099-C Form

The 1099-C IRS form is an information form that you’ll submit with your tax form, as you would your W-2. You’ll take information from this form to answer questions on your 1040 or another tax form. 

There are many types of 1099 forms, but 1099-C deals with debt cancelation. In 2019, of the three million 1099 forms submitted to the IRS, about 500,000 of them were filed for cancellation of debt. This amounted to just over $4 billion of forgiven debt in tax year 2018. Using those statistics from the IRS, the average debt forgiveness for 1099-C taxpayers appears to be about $8,000 per 1099-C filer. This shows that you’re certainly not alone if you’ve had debt forgiven! 

Excerpt from IRS Report Statistics of Income Individual Income Tax Returns Complete Report 2018 (for the filing year 2019) showing debt cancellation statistics.

Excerpt from IRS Report Statistics of Income Individual Income Tax Returns Complete Report 2018 (for the filing year 2019) showing debt cancellation statistics.

The lender sending you the 1099-C cancellation of debt form will have also provided the IRS with a copy. The IRS uses this data to cross-check returns. Let’s say that a lender sent a 1099-C to the IRS saying that it forgave a $1 million debt to Person X and Person X did not file a tax return that included the 1099-C. The IRS would notice and Person X would face potential financial penalties and even jail time. Don’t ignore your 1099-C, even if your forgiven debt is small. 

1099-C Form used for debt forgiveness

Box 1 

This is the date upon which the debt was canceled. The box description says “date of identifiable event.” The event that’s described as “identifiable” could be one of the following:

  • Bankruptcy Discharge

  • Cancellation in receivership, foreclosure, or another non-federal proceeding

  • Expired statute of limitations date

  • Local law forbidding post-foreclosure collection

  • Probate or similar proceeding that extinguished a debt

  • Date of agreement between debtor and creditor to cancel the debt

  • Date defined policy of the creditor triggers debt cancellation

  • Debt cancellation if before any of the identifiable events listed above

Box 2

This is the amount of debt discharged. It includes accrued interest. 

Box 3

This is the amount of accrued interest that’s included in Box 2. 

Box 4

This box is a description of the debt. For instance, it might say mortgage, auto loan, or personal loan. 

Box 5

If box 5 is checked, this means that the debt was for a business entity but that the person receiving the 1099-C is personally liable for that debt. If you personally guaranteed a business loan, even if your business is incorporated, you can be held personally liable. Lenders often work personal guarantees into contracts with businesses. 

Box 6

This is a box for a letter code:

A = Bankruptcy discharge

B = Other judicial debt relief

C = Statute of limitations expiration

D = Foreclosure election

E = Probate or a similar proceeding

F = By agreement

G = Decision or policy to discontinue collection

H = Other actual discharge before the identifiable event

Box 7

This is the fair market value for the property. This box will be filled in if the debt forgiveness is for property, a vehicle, or business equipment. The value could be sourced from the tax assessor’s office, the Kelley Blue Book, or industry market data. 

The 1099-C form is small, but there’s a lot of info packed into it. Hopefully, you won’t have to pay a lot of taxes on the income. You may even qualify for some exclusions. 

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Exclusions from Taxable Income

The IRS excludes some income from being taxed. If an exclusion rule applies to you, the IRS may not consider your debt forgiveness amount to be taxable income. This means that you can exclude it from your gross income, which might mean the difference between getting a tax refund and owing the IRS money. 

Here’s a list of exclusions from taxable income for individuals (many of these do not apply to Chapter 11 business bankruptcies): 

  • Insolvency: When your liabilities are more than your assets on the date your debt was forgiven (Box 1 Form 1099-C has the date), you are considered insolvent. For example, let’s say you have $20,000 worth of debt, $10,000 worth of assets, and $5,000 of your debt was forgiven. Even if you reduce the total debt by the amount that was forgiven, the $15,000 that you still owe is more than the $10,000 worth of assets that you could use to pay it back. 

  • Bankruptcy discharge: A court order discharging debt after a bankruptcy proceeding. 

  • Qualified main home indebtedness: The debt was related to your main personal principal residence. This exclusion is allowed through 2025. The limit is $750,000. If you think that this exclusion applies to you, it’s best to seek professional tax advice.

  • Qualified farm indebtedness: The debt was related to your farm. Fifty percent of gross receipts from three years before the date of debt forgiveness must be from farming. Some part-time farms do not qualify for this exclusion. This situation can get complicated, so it’s smart to speak with an attorney or tax professional if this situation applies to you.

  • Qualified business real property indebtedness: The debt was related to real property related to your business that is not incorporated, and the debt was incurred to buy, construct, or improve real property. This, too, is complex. Consult a tax expert and attorney to learn more.

  • Some student loan indebtedness: This is a new exclusion created via the 2021 American Rescue Plan Act in response to the economic pitfalls of the coronavirus pandemic. It is set to last through 2025. 

Previously, forgiven student debt was taxable. Taxes averaged $2,000 for every $10,000 in student debt that was forgiven. This is no longer the law. You will not have to pay taxes on student loan forgiveness under this exclusion. An exclusion will increase your chances for a tax refund, and you won’t have to pay taxes on your debt forgiveness, but you’ll have to fill out Form 982. 

Form 982

IRS Form 982 is more complicated than a 1099-C. If you or your tax consultant decide to exclude your debt forgiveness from income taxes, you must file Form 982 to detail your reason for exclusion. You’ll basically be telling the IRS, “Hey, this shouldn’t be considered part of my gross income, and this is why.” Insolvency would be an example. Part I of Form 982 asks you to check the box that applies to your situation. Many people just have to fill out Part I and don’t have to fill out Part II. 

Part II in Form 982 gets a little complicated, and it would be in your best interest to have a tax professional assist you. If you received debt forgiveness because of a qualified farm or business real property, you’re going to have to fill out Part II. This section addresses the questions of full or partial deductions, depreciation, and business credit carryovers. It is strongly suggested that you consult a professional tax preparer if any of these circumstances apply to you. 

Taxes are complicated

Debt cancellation is a complex matter because there are so many intertwined IRS rules, regulations, deductions, and exclusions - especially when mixed with challenges concerning real estate, homes, businesses, and farms. The Tax Code is covered in U.S. Code Title 26. Many tax professionals estimate that it has about 1 million words. That’s a similar length to the entire Harry Potter series but not as enjoyable to read. Others have said that it has closer to 4 million words based on an automated word count. The bottom line is: The Tax Code is complicated, and if you have the means to pay for a tax preparer, it’s a worthwhile investment.

If your debt forgiveness involves insolvency or carry-over calculations, you may even need to seek help from a Certified Public Accountant (CPA). Many attorneys specialize in both bankruptcy and tax law and many firms have CPAs on staff. If you can’t afford an attorney, the government has programs offering free tax assistance

Let’s Summarize…

Unless you have one of the exclusions listed above—such as insolvency, bankruptcy, main home, farm, or business debt forgiveness—you will likely have to pay taxes on any debt that’s been forgiven or canceled that is more than $600. This is reported to the IRS on Form 1099-C. If you have a complicated exclusion, you’ll probably need the help of a tax professional to help you file an accurate federal tax return that is most favorable to your circumstances. Be sure to check all your options. You can still get a tax refund with debt forgiveness.

Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney Andrea Wimmer


Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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