Form 1099-C: Cancellation of Debt (2017) – A Layman's Guide
What Form 1099-C Is For
Form 1099-C is an IRS information return that financial institutions and creditors must send you when they cancel or forgive $600 or more of your debt. When a lender "writes off" money you owe—whether it's credit card debt, a personal loan, or a mortgage—they report this to the IRS because the forgiven amount typically counts as taxable income.
Think of it this way: if you borrowed $10,000 and only paid back $5,000, with the lender forgiving the remaining $5,000, the IRS considers that $5,000 as money you "received" without paying it back. Just as you'd pay taxes on a $5,000 bonus from work, you generally must pay taxes on forgiven debt.
Financial institutions required to issue Form 1099-C include banks, credit unions, federal government agencies, credit card companies, and any organization whose significant business involves lending money. You'll receive Copy B of this form by January 31 following the year your debt was canceled, and the IRS receives a copy too IRS.gov.
When You’d Use Form 1099-C
As a debtor, you don't file Form 1099-C—you receive it and use it to prepare your tax return. If you receive this form, you must report the canceled debt on your 2017 tax return (Form 1040, line 21 for most non-business debts) by the April 15, 2018 deadline.
Late or Amended Filing
Late or Amended Returns: If you didn't receive Form 1099-C until after you filed your 2017 return, or if you forgot to include canceled debt you received, you must file an amended return using Form 1040X. You have generally three years from the original filing deadline to amend. Even if you never received Form 1099-C, you're still legally required to report canceled debt as income unless an exception or exclusion applies IRS.gov.
Important: For 2017, the IRS eliminated the "36-month non-payment rule," meaning creditors could no longer automatically file Form 1099-C just because you hadn't made payments for 36 months. Creditors must now report only when an actual "identifiable event" occurs.
Key Rules or Details for 2017
The $600 Threshold: Creditors must issue Form 1099-C only when they cancel $600 or more of debt. Multiple small cancellations can't be combined to reach this threshold unless there's evidence of a plan to evade reporting requirements.
Identifiable Events: Creditors file Form 1099-C when specific events occur, coded in Box 6 of the form:
- Code A: Bankruptcy discharge
- Code B: Court-ordered debt relief (foreclosure, receivership)
- Code C: Statute of limitations expired
- Code D: Foreclosure that legally bars further collection
- Code E: Probate court debt cancellation
- Code F: Agreement between creditor and debtor
- Code G: Creditor's policy to discontinue collection
- Code H: Other actual discharge
Recourse vs. Non-Recourse Debt: Understanding this distinction is crucial. Recourse debt means you're personally liable—if the lender forecloses and the property sells for less than you owe, you're still on the hook for the difference. With non-recourse debt, the lender can only take the property; they can't pursue you personally for any shortfall.
Multiple Debtors: If you and another person (like a spouse) were jointly liable for a $10,000 debt that was canceled in 2017, you might each receive Form 1099-C showing the full $10,000. However, you won't necessarily each pay tax on $10,000—how much each person reports depends on who received the loan proceeds, who claimed interest deductions, and other factors IRS.gov.
Step-by-Step (High Level)
Step 1: Receive and Review
When you receive Form 1099-C, check Box 2 (amount of debt canceled), Box 3 (interest included, if any), and Box 6 (identifiable event code). Verify the amount is accurate.
Step 2: Determine if Exceptions Apply
Before including the canceled debt as income, check if any exceptions apply:
- Was this a gift, bequest, or inheritance?
- Was it a student loan canceled because you worked in public service?
- If the debt was business-related and you use cash accounting, would paying it have been deductible?
- Was this a price reduction by the seller after purchase?
Step 3: Determine if Exclusions Apply
If no exceptions apply, check if you qualify for exclusions (which require filing Form 982):
- Bankruptcy: Was the debt discharged in Title 11 bankruptcy?
- Insolvency: Were your total debts greater than the fair market value of your assets immediately before cancellation?
- Qualified principal residence indebtedness: Was this mortgage debt on your main home (note: for 2017, special rules apply only if arrangements were in place before 2017)?
- Qualified farm indebtedness: If 50%+ of your income came from farming
- Qualified real property business indebtedness: For business real estate debt
Step 4: Complete Form 982 (If Applicable)
If you qualify for an exclusion, complete Form 982 and attach it to your Form 1040. Check the appropriate box on line 1 and enter the excluded amount on line 2. You must also reduce your "tax attributes" (such as net operating losses or basis in property) in Part II.
Step 5: Report on Your Tax Return
Include any taxable canceled debt that doesn't qualify for exceptions or exclusions on Form 1040, line 21 (other income). If the debt was business-related, report it on Schedule C IRS.gov.
Common Mistakes and How to Avoid Them
Mistake #1: Ignoring Form 1099-C
Many taxpayers receive Form 1099-C and throw it away, thinking "I didn't receive any money, so this doesn't matter." The IRS has a copy and expects you to report it. Solution: Always report Form 1099-C on your return, even if the amount is ultimately excludable.
Mistake #2: Reporting the Full Amount Without Checking Exclusions
The most costly mistake is immediately adding the canceled debt to your income without investigating whether you qualify for bankruptcy or insolvency exclusions. Solution: Use the Insolvency Worksheet in IRS Publication 4681 to calculate whether your liabilities exceeded your assets at the time of cancellation.
Mistake #3: Claiming Insolvency Without Proper Documentation
Some taxpayers claim the insolvency exclusion without actually being insolvent or without proper records. Remember: insolvency means total debts exceed total assets (including retirement accounts, home equity, and even exempt assets). Solution: Create a detailed balance sheet showing all assets and liabilities as of the cancellation date and keep supporting documents.
Mistake #4: Double-Counting with Joint Debts
When spouses file separately and both receive Form 1099-C for the same $10,000 debt, each might wrongly report $10,000. Solution: Allocate the canceled debt based on who benefited from the loan proceeds and document your reasoning.
Mistake #5: Not Reducing Tax Attributes
If you exclude canceled debt under bankruptcy or insolvency, you must reduce tax attributes like net operating losses or property basis. Failing to complete Part II of Form 982 can cause future tax problems. Solution: Work with a tax professional or carefully follow Form 982 instructions.
Mistake #6: Confusing Foreclosure with Cancellation
Foreclosure and debt cancellation are separate events that may both happen. You may have a gain or loss on the foreclosure plus cancellation of debt income if you owed more than the property's value. Solution: Calculate each separately using IRS Publication 4681, Chapter 2 IRS.gov.
What Happens After You File
If You Properly Report
If you accurately report your canceled debt—either as income or properly excluded on Form 982—the IRS will process your return normally. You'll either receive your refund or pay any balance due according to standard timelines.
If You Don't Report
The IRS receives a copy of every Form 1099-C. Through automated matching, they'll notice if your return is missing this income. Typically 12-18 months after filing, you'll receive a CP2000 notice proposing additional tax, plus interest and potentially penalties. The burden shifts to you to prove why the debt should be excluded.
Statute of Limitations
The IRS generally has three years from your filing date to audit your return. However, if you omit more than 25% of your gross income (including unreported canceled debt), they have six years.
Credit Reporting
Receiving Form 1099-C doesn't automatically mean the creditor can't still try to collect the debt. Verify with the creditor whether the debt is truly discharged or just written off for accounting purposes. If truly canceled, the debt should be reported as "charged off" on your credit report.
State Tax Implications
Most states follow federal rules for canceled debt, but some (like California) have different exclusion rules, particularly for mortgage debt forgiveness. Check your state's requirements.
FAQs
Q1: I received Form 1099-C years after the debt was canceled. Do I need to amend old returns?
Yes, if you received Form 1099-C for a debt that was actually canceled in a prior year and you didn't report it, you should amend that year's return. The form's "Date of Identifiable Event" in Box 1 tells you which tax year to report. However, if the statute of limitations has expired (generally three years), the IRS typically can't require you to amend unless fraud was involved.
Q2: My total debts exceeded my assets. Am I completely off the hook for taxes on canceled debt?
Not necessarily. The insolvency exclusion only applies up to the amount you were insolvent. If your debts exceeded your assets by $3,000, but $5,000 of debt was canceled, you can exclude $3,000 but must pay tax on the remaining $2,000. Use the Insolvency Worksheet in Publication 4681 to calculate precisely.
Q3: Can the creditor still pursue me for payment after sending Form 1099-C?
Possibly. Form 1099-C is a tax reporting document, not a legal release of debt. In some states, creditors can write off debt for their accounting purposes (triggering Form 1099-C) while still legally pursuing collection. Contact the creditor to confirm whether the debt is truly forgiven or just charged off.
Q4: I filed bankruptcy in 2016, but received Form 1099-C in 2017 for debt included in that bankruptcy. What do I do?
File Form 982 with your 2017 return checking box 1a (bankruptcy exclusion) and enter the amount from Box 2 of Form 1099-C on line 2. The bankruptcy exclusion means you don't pay tax on this debt, but you must reduce your tax attributes in Part II. Even though the bankruptcy was in 2016, you report it in 2017 because that's when you received the form IRS.gov.
Q5: Box 3 of my Form 1099-C shows interest included in the canceled debt. Do I report this differently?
Generally no, unless the interest would have been deductible if you paid it (like mortgage interest or business loan interest). If the interest would've been deductible, you don't include that portion as income. The remaining non-deductible interest is treated like any other canceled debt.
Q6: I had $8,000 of credit card debt canceled, but I'm a full-time student with almost no income. Do I still owe taxes?
You must still report the canceled debt as income (unless an exclusion applies). However, if your total income including the canceled debt is below the standard deduction ($6,350 for single filers in 2017), you won't owe federal income tax. You still must file a return if your gross income exceeds the filing threshold.
Q7: For 2017, can I exclude my home mortgage debt that was forgiven in a short sale?
The Mortgage Forgiveness Debt Relief Act expired December 31, 2016, so most principal residence debt forgiven in 2017 is taxable unless: (1) the discharge was subject to a written arrangement entered into before January 1, 2017, or (2) you qualify for another exclusion like bankruptcy or insolvency. Check if you qualify for the insolvency exclusion before assuming you must pay tax on the full amount.
Additional Resources
This guide is for informational purposes only and does not constitute tax advice. For complex situations, consult a qualified tax professional.
