Form 1099-C: Cancellation of Debt (2018) – A Complete Guide
What Form 1099-C Is For
Form 1099-C, Cancellation of Debt, is an official IRS information return that creditors send to you—and file with the IRS—when they cancel or forgive $600 or more of debt you owe them. Think of it as a tax notification saying, "This debt you didn't have to pay back might count as taxable income."
When a lender cancels all or part of what you owe, the IRS generally treats that forgiven amount as income you've received, much like you would if someone handed you cash. The form reports this to both you and the government, ensuring everyone's on the same page come tax time. You'll typically receive Form 1099-C from banks, credit unions, credit card companies, mortgage lenders, government agencies, and other organizations whose primary business involves lending money.
The form shows critical details including the date of the cancellation, the amount of debt discharged (Box 2), any interest included in that amount (Box 3), a description of the debt, and an "identifiable event code" (Box 6) explaining why the creditor canceled the debt—such as bankruptcy, foreclosure, statute of limitations expiration, or a settlement agreement between you and the creditor.
When You’d Use Form 1099-C (Late/Amended Filing)
As a taxpayer, you don't actually file Form 1099-C yourself—your creditor does. However, you must report the canceled debt shown on the form when you file your annual tax return for 2018, which was originally due April 15, 2019 (or October 15, 2019, if you filed for an extension).
If You Need to File a Late Return
If you never filed your 2018 tax return and you received a Form 1099-C for that year, you should file as soon as possible. The IRS doesn't have a formal statute of limitations on unfiled returns, and penalties accrue over time. Use the 2018 version of Form 1040 and include the canceled debt information unless an exception or exclusion applies.
If You Need to File an Amended Return
Perhaps you initially forgot to report the canceled debt, or you later discovered you qualify for an exclusion (such as insolvency or bankruptcy) that you didn't claim. In these cases, file Form 1040-X, Amended U.S. Individual Income Tax Return, for tax year 2018. You generally have three years from the original filing deadline to claim a refund, though different rules apply if you're reporting additional income. Attach Form 982 (Reduction of Tax Attributes) if you're claiming an exclusion like bankruptcy or insolvency.
Important Note
Even if you never received a Form 1099-C from your creditor, you're still legally required to report canceled debt as income unless an exception or exclusion applies. Missing forms don't eliminate your reporting obligation.
Key Rules or Details for 2018
The $600 Threshold
Creditors must file Form 1099-C when they cancel $600 or more of debt. However, you must report canceled debt on your tax return regardless of whether you received the form.
Identifiable Events Trigger Reporting
Creditors must file Form 1099-C when specific "identifiable events" occur, including: bankruptcy discharge (Code A), court-ordered debt relief (Code B), statute of limitations expiration (Code C), foreclosure (Code D), probate proceedings (Code E), settlement agreements (Code F), creditor's decision to stop collection (Code G), or other actual discharge (Code H). The form reports the year the identifiable event occurred, which may differ from when the creditor actually stopped trying to collect.
Multiple Debtors
For debts of $10,000 or more incurred after 1994 where multiple people are jointly liable, each person receives a Form 1099-C showing the full canceled amount. However, your actual reportable income depends on factors like who received the loan proceeds and what percentage of the debt each person was responsible for.
Principal Versus Interest
For lending transactions, creditors must report only the canceled principal amount, not interest. If they choose to include interest in Box 2, they must also show it separately in Box 3. Whether you must include canceled interest as income depends on whether that interest would have been tax-deductible.
Qualified Principal Residence Indebtedness Exclusion (2018 Special Rule)
For tax year 2018, the exclusion for canceled qualified principal residence indebtedness (mortgage debt on your main home) had technically expired as of December 31, 2017. However, Congress frequently extended this provision retroactively. If your mortgage lender sent you a written trial period plan or opt-out letter before January 1, 2018, and your permanent loan modification occurred in 2018, you could qualify if the arrangement was entered into and evidenced in writing before January 1, 2018.
Step-by-Step (High Level)
Step 1: Receive and Review the Form
When Form 1099-C arrives (typically by January 31 following the tax year), carefully review all boxes. Verify the creditor information, debt amount (Box 2), date of identifiable event (Box 1), identifiable event code (Box 6), and debt description (Box 4). If anything looks incorrect, contact the creditor immediately to request a corrected form.
Step 2: Determine If Exceptions Apply
Several situations mean you don't have canceled debt income at all. Common exceptions include: debt canceled as a gift or inheritance; certain student loan cancellations due to death, disability, or meeting work requirements; deductible debt (where payment would have been tax-deductible); price reductions from the original seller; and amounts related to Home Affordable Modification Program payments. If an exception applies, you typically don't report the amount on your return and don't need to file Form 982.
Step 3: Check for Exclusions
If no exception applies, determine whether you qualify for an exclusion that makes the canceled debt nontaxable. The major exclusions for 2018 include: bankruptcy (debt discharged in Title 11 bankruptcy), insolvency (your total debts exceeded your total assets immediately before cancellation), qualified farm indebtedness, qualified real property business indebtedness, and qualified principal residence indebtedness (with 2018 limitations). Each exclusion has specific requirements and documentation needs.
Step 4: Calculate Your Taxable Amount
If you qualify for the insolvency exclusion, complete the Insolvency Worksheet (found in IRS Publication 4681) to determine how insolvent you were immediately before the cancellation. You can only exclude canceled debt up to your insolvency amount. Any excess is taxable income. For example, if you were insolvent by $5,000 but had $8,000 of debt canceled, $5,000 is excluded and $3,000 is taxable.
Step 5: Complete Form 982 (If Applicable)
If you're excluding canceled debt from income due to bankruptcy, insolvency, qualified farm indebtedness, qualified real property business indebtedness, or qualified principal residence indebtedness, you must file Form 982 with your tax return. Check the appropriate box on line 1, enter the excluded amount on line 2, and complete Part II to reduce your "tax attributes" (explained in the next section).
Step 6: Report on Your Tax Return
Report any taxable canceled debt as "other income" on Schedule 1 (Form 1040), line 21. For business-related canceled debt, report on the appropriate business schedule (Schedule C for sole proprietors, Schedule F for farmers, etc.). Attach Form 982 if you completed it. Keep all documentation—the Form 1099-C, worksheets, Form 982, and any evidence supporting your exclusion claims—for at least four years.
Common Mistakes and How to Avoid Them
Mistake #1: Ignoring Form 1099-C Entirely
Many taxpayers assume canceled debt isn't "real" income because they never received actual money. Wrong. The IRS treats most canceled debt as taxable income.
Solution: Always report Form 1099-C amounts on your return unless you're certain an exception or exclusion applies.
Mistake #2: Forgetting About Insolvency
Countless taxpayers pay taxes on canceled debt when they were actually insolvent at the time of cancellation.
Solution: Complete the Insolvency Worksheet from IRS Publication 4681, which compares your total liabilities to your total assets immediately before cancellation. Include all assets (retirement accounts, home equity, personal property) and all liabilities (mortgages, credit cards, medical bills, student loans). If liabilities exceed assets, you were insolvent to that extent.
Mistake #3: Confusing Foreclosure/Repossession with Simple Debt Cancellation
When property securing a debt is foreclosed or repossessed, you're actually dealing with two potential tax events: a gain or loss on the disposition of the property AND potentially canceled debt income.
Solution: For recourse debt (where you're personally liable), calculate your gain/loss on the property separately from any forgiven deficiency balance. For nonrecourse debt, the entire debt amount is treated as part of the sale proceeds.
Mistake #4: Failing to File Form 982
Some taxpayers claim exclusions on their return without completing the required form. This raises red flags.
Solution: Always attach Form 982 when claiming bankruptcy, insolvency, or other exclusions. Complete both the front (exclusion election) and Part II (tax attribute reduction).
Mistake #5: Not Understanding "Tax Attribute Reduction"
When you exclude canceled debt from income, you must reduce certain tax benefits—called "tax attributes"—dollar-for-dollar. These include net operating losses, general business credits, minimum tax credits, capital loss carryovers, basis in property, and passive activity loss carryovers.
Solution: Work with a tax professional if you have significant tax attributes, as miscalculating these reductions can create problems in future tax years.
Mistake #6: Assuming Qualified Principal Residence Exclusion Applies to 2018
This popular exclusion for forgiven mortgage debt on your main home technically expired after 2017, though certain arrangements made before January 1, 2018, might still qualify.
Solution: Check IRS.gov for congressional extensions and carefully document any workout arrangements entered into before the cutoff date.
Mistake #7: Double-Counting on Joint Returns
When spouses file jointly and both received Forms 1099-C for the same debt showing the full amount, they sometimes mistakenly report the debt twice.
Solution: Report the actual total canceled debt once, not the sum of both forms. Allocate the canceled debt based on who was responsible and who was insolvent.
What Happens After You File
Immediate Effects
Once you file your 2018 return with the Form 1099-C information properly reported, the IRS matches your return against forms filed by creditors. If everything matches and you've correctly applied any exclusions, your return processes normally.
If You Claimed an Exclusion
Filing Form 982 doesn't automatically trigger an audit, but it does flag your return for potential review. The IRS may request documentation proving you were insolvent (bank statements, property appraisals, loan documents from the date of cancellation) or that you were in bankruptcy (discharge papers, bankruptcy court documentation). Keep these records accessible.
Tax Attribute Consequences
If you excluded canceled debt using the insolvency or bankruptcy exclusions, you must reduce your tax attributes on Form 982, Part II. This means less favorable tax treatment in future years. For example, if you reduced your basis in your home by $10,000, you'll pay more capital gains tax when you eventually sell. These consequences can last for years or even decades, so understanding them is crucial.
State Tax Implications
While you've addressed your federal taxes, don't forget state taxes. Many states follow federal treatment of canceled debt, but some have different rules. Check your state's tax authority website or consult a local tax professional about your state's treatment of Form 1099-C income and whether your state recognizes federal exclusions.
Future Credit Implications
Receiving a Form 1099-C usually means your creditor has written off the debt. This may appear on your credit report as a charge-off, which can negatively impact your credit score for up to seven years. From a tax perspective, once debt is canceled and properly reported, you won't face future IRS consequences for that specific cancellation.
IRS Notices
If the IRS believes you underreported income from canceled debt or improperly claimed an exclusion, you'll receive a notice (often CP2000 or similar). These notices typically arrive 12-24 months after filing. Respond promptly with documentation supporting your position. If you realize you made an error, you can file Form 1040-X to correct it before the IRS contacts you.
FAQs
1. I received Form 1099-C years after the debt was actually forgiven. Do I have to report it?
Yes, typically you must report the canceled debt in the year shown in Box 1 (Date of Identifiable Event), not when you receive the form. If you should have reported it in an earlier year, you may need to file an amended return (Form 1040-X) for that year. However, you have some protection: if the statute of limitations has expired for that earlier year (generally three years from the filing deadline), the IRS generally can't assess additional tax. Consult a tax professional for guidance on your specific situation.
2. Can I still be responsible for the debt after receiving Form 1099-C?
From a tax perspective, you're usually finished once you report the Form 1099-C on your return. However, state laws vary regarding whether creditors can continue collection efforts after issuing a 1099-C. Some creditors mistakenly issue the form prematurely. If the creditor later resumes collection, contact them immediately and request clarification. You may need to file an amended tax return if the debt wasn't actually canceled.
3. What if my insolvency excludes part but not all of the canceled debt?
This is common. If you were insolvent by $5,000 but had $8,000 of debt canceled, you can exclude $5,000 under the insolvency exclusion and must report the remaining $3,000 as taxable income. Complete Form 982, indicating $5,000 as excluded, reduce your tax attributes by $5,000, and report $3,000 on Schedule 1 (Form 1040), line 21.
4. Do I need to file Form 982 if I was in bankruptcy?
Yes. Even though bankruptcy exclusions are straightforward, Form 982 is mandatory. Check box 1a, enter the total canceled amount on line 2, and complete Part II to show your tax attribute reduction. The form tells the IRS why you're not reporting the canceled debt as income.
5. My Form 1099-C shows a debt amount that's incorrect. What should I do?
Contact the creditor immediately and request a corrected Form 1099-C. They should issue a corrected version and file it with the IRS. If you can't resolve it before your filing deadline, file your return with the correct amount and attach a statement explaining the discrepancy and why you believe the creditor's amount is wrong. Include any documentation supporting your position. Expect possible IRS follow-up requiring you to prove your position.
6. I had credit card debt canceled. Is that treated differently from mortgage debt?
For 2018, nonbusiness credit card debt canceled outside bankruptcy generally doesn't qualify for any special exclusions (other than insolvency). However, canceled mortgage debt on your principal residence might qualify for the qualified principal residence indebtedness exclusion if the arrangement was entered into before January 1, 2018. The type of debt matters primarily in determining which exclusions you might qualify for.
7. Can I deduct the debt amount instead of reporting it as income?
No. Canceled debt isn't a deduction opportunity—it's a potential income inclusion. The only way to avoid paying tax on canceled debt is to prove an exception applies (like it was really a gift) or you qualify for an exclusion (like bankruptcy or insolvency). You can't simply deduct the amount to offset the income.
Additional Resources
- 2018 Instructions for Forms 1099-A and 1099-C
- Publication 4681 (2018) – Canceled Debts, Foreclosures, Repossessions, and Abandonments
- About Form 1099-C
