How to Report a 1099-C for a Charged-Off Debt

Receiving Form 1099-C, Cancellation of Debt, after a creditor designates a debt as “charged-off” can create confusion about your financial and tax responsibilities. A charge-off is an internal accounting action, while the 1099-C reports forgiven debt as potential income to you. Understanding the distinction between these events is the first step in navigating your tax obligations. This form does not always mean you owe more tax, but it does require you to take specific action on your return.

Understanding the Charge-Off and Form 1099-C

A “charge-off” is an accounting action creditors take when a debt is delinquent, often for 180 days. This internal bookkeeping classifies the loan as a loss for the lender, but it does not mean your debt is forgiven. The creditor can still attempt to collect the amount owed or sell the debt to a collection agency.

Following a charge-off or other “identifiable event,” a creditor must issue Form 1099-C if a debt of $600 or more is canceled. The form reports the forgiven amount as potential income. When you initially received the loan, it was not considered income because you had an obligation to repay it. Once that obligation is legally removed, the forgiven amount is viewed as income from a tax perspective.

You may receive a 1099-C even if the creditor still intends to collect the debt, as the form is primarily an IRS reporting requirement. While some court rulings suggest issuing a 1099-C legally cancels the debt, the prevailing view is that collection activities may continue.

Determining if the Canceled Debt is Taxable

Canceled or forgiven debt is considered taxable income. This is because you received funds without the obligation to pay them back, which the tax code treats as an increase to your net worth. The amount in Box 2 of Form 1099-C is the figure the IRS will presume is part of your gross income.

However, several exceptions can allow you to exclude this canceled debt from your taxable income. The most common exclusion for individuals is insolvency. You are considered insolvent if, immediately before the debt was canceled, your total liabilities were greater than the fair market value of all your assets. The amount you can exclude is limited to the amount by which you were insolvent.

Another exclusion is bankruptcy. If a debt is discharged in a Title 11 bankruptcy case, such as a Chapter 7 or Chapter 13 filing, it is not considered taxable income. This exclusion takes precedence over the insolvency rule, so you do not need to perform the insolvency calculation.

Other specific situations also allow for an exclusion. These can include the cancellation of qualified farm indebtedness, qualified real property business indebtedness, and certain student loans with provisions for cancellation for working in specific professions. An exclusion for qualified principal residence indebtedness, which allows homeowners to exclude forgiven mortgage debt on their main home, was extended through 2025.

Information Needed to Report the Canceled Debt

If you plan to claim an exclusion for the canceled debt, you must determine your financial position at the exact moment before the cancellation. The date of cancellation is provided in Box 1 of the Form 1099-C.

To calculate insolvency, you must create a detailed list of all your assets and their fair market value. Assets include cash, the value of your home and other real estate, the market value of vehicles, retirement accounts, and investments. You must then compile a complete list of your liabilities, which includes all outstanding debts like mortgages, car loans, student loans, and credit card balances. The goal is to create a personal balance sheet as of the day before the cancellation.

How to Report Form 1099-C on Your Tax Return

You must report the canceled debt on your annual income tax return, typically Form 1040, even if you believe the debt is not taxable. The IRS receives a copy of the form from the lender and will expect to see it addressed on your return. The method for reporting depends on whether the canceled debt is taxable or if you qualify for an exclusion.

If the canceled debt is taxable, you must include the amount from Box 2 of Form 1099-C as “Other income.” This is reported on Schedule 1 of Form 1040. The total from this schedule then flows to the main Form 1040, where it is added to your gross income. Failing to report taxable canceled debt can lead to an IRS notice, penalties, and back taxes.

If you are excluding the debt from income, you must complete and attach IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. On this form, you will officially declare the reason you are eligible to exclude the canceled debt from income. For instance, if you are claiming insolvency, you will check the box on line 1b and enter the amount of canceled debt you are excluding on line 2. The amount you can exclude cannot exceed the amount by which your total liabilities exceeded your total assets.

You still report the full amount of canceled debt from Box 2 on the “Other income” line of Schedule 1. On the same line, you will then subtract the amount you are legally allowed to exclude. This results in a net income of zero from the canceled debt on your return, and attaching Form 982 validates the exclusion.