Received a Form 1099-C? Here’s How to Report That Cancellation of Debt on Your Taxes


Imagine this: all your remaining student loans have been forgiven after diligently paying them for 20-25 years under an income-driven plan. You’re finally free!

Then you receive Form 1099-C and think, “What is this?” Unfortunately, it’s not just another piece of junk mail.

What is Form 1099-C?

Form 1099-C is the official tax document that reflects your cancellation of debt. While you may think it’s just another of the many useless forms you receive around tax time, it’s actually very important.

When you receive a 1099-C, which reflects your forgiven or discharged debt, you must report the forgiven amount on your taxes, as it could be considered taxable income.

According to Jessie Seaman, Esq., a managing licensed tax professional at Tax Defense Network, “When you have a debt forgiven or cancelled, the IRS determines this taxable income; the idea being that you purchased goods or services which you ultimately did not have to pay back in full. Your lender issues a 1099-C, which details the debt cancellation. Both you, the taxpayer, and the IRS receive copies, not unlike a W2.”

What to do if you get a 1099-C

If you receive Form 1099-C, do two things:

  1. Don’t panic
  2. Don’t ignore it

If you receive Form 1099-C, you must include it as part of your tax return for the year your debt was forgiven or discharged.

Failure to do so will only delay the process and you are likely to receive a notice from the IRS saying you owe taxes on your forgiven debt. There may also be penalties for being late.

Here are some steps to take if you receive Form 1099-C:

1. Verify the amount in Box 2, which is the amount of debt discharged. You’ll want to make sure it’s accurate.

As you can see, it only reflects the amount of debt that was discharged, not how much you actually paid. So if you had $100,000 in student loans, but got $30,000 forgiven, the amount of $30,000 should be reflected in Box 2. If there are any errors with Form 1099-C, contact your creditor for a corrected version.

2. Talk to a tax professional. In the majority of cases, getting any debt forgiven or discharged will result in an increase in taxable income. The amount of your potential tax bill can vary widely depending on a number of factors, including where you live, how much debt you had forgiven, and your current tax bracket.

Michael Eckstein, a Tax Accountant at, explained, “Canceled debt income is taxed as ordinary income and that can significantly increase your tax burden. On top of that, canceled debt income will often increase total income by enough to disqualify you from claiming many deductions and credits, thereby limiting your ability to decrease your tax burden.”

3. File your tax return. When you get Form 1099-C, you’ll include the amount discharged on your federal tax return. According to the IRS, you’ll report any canceled debt on Form 1040 on line 21.

4. Pay your tax bill. Once you understand how much you might owe, make sure to pay your tax bill. If you can’t afford your tax bill, you could sign up for a payment plan with the IRS, thought there may be additional penalties and interest.

What to know about Form 1099-C, Cancellation of Debt

Getting Form 1099-C in the mail can be a nerve-wracking experience. However, you must report any forgiven debt even if you didn’t receive Form 1099-C.

So if you ever qualify for student loan forgiveness from an income-driven plan or disability discharge, you will still need to report the forgiven amount on your taxes. The only exception to this is if you receive student loan forgiveness through Public Service Loan Forgiveness or through another loan forgiveness program related to your profession.

It may seem cruel to have to pay taxes on a loan you probably couldn’t afford in the first place, hence the forgiveness or discharge, but that’s the way the law is set up currently. The reasoning is that if you take out a loan, you are legally expected to pay it back.

If you get help through forgiveness, then you’re paying taxes on the forgiven amount. If this law wasn’t in place, there’d be nothing to prevent people from taking out loans and getting it forgiven, without any consequences.

While cancellation of debt more often than not leads to an increase in taxable income, there are a few exceptions that you should know about.

Stephan M. Brown, tax attorney at NewPoint Law Group, said, “Although in most circumstances, forgiven debt is treated as income, there are some exceptions to this rule including bankruptcy, insolvency, and an amount cancelled as a gift.”

You may be able to prove that you are insolvent at the time of the cancellation of debt. Typically, you are insolvent if your debt amount exceeds your assets. According to the IRS, “Don’t include a canceled debt in income to the extent that you were insolvent immediately before the cancellation.”

So if you believe you were insolvent prior to receiving loan forgiveness, you don’t have to include your forgiven debt on your tax return.

To help you figure out if you qualify insolvent, you can use this Insolvency Worksheet provided by the IRS. In order to claim this exclusion, you will need to file Form 982.

If you truly could not afford your debt, you may be eligible for this exclusion and be off the hook for paying taxes on your forgiven debt.

Final word

For many people, receiving a Form 1099-C, Cancellation of Debt may come as a surprise. If you have gotten your student loans forgiven or discharged through disability — or are planning to in the future — make sure you report the total amount on your tax return the year it is forgiven, whether you receive Form 1099-C or not.

If your liabilities (debt) exceed your assets, you may want to prove that you are insolvent and unable to pay taxes on your forgiven debt. If you have any questions about cancellation of debt Form 1099-C, seek out professional help from a tax specialist.

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