1099-C frequently asked questions

Have you received a Form 1099-C in the mail from a lender? You might be wondering what this form is and why it ended up in your mailbox. This isn’t surprising: Most taxpayers don’t realize that canceled or forgiven debts are considered income by the IRS – income you may have to pay taxes on.

Lenders send 1099-C forms to people after they’ve forgiven some or all of their debt. It’s up to you to report the forgiven debt listed on this form on your federal income taxes.

The challenge? Many 1099-C forms contain errors, and experts say it’s one of the more confusing tax forms.

But there are some rules, including an important one on timing: Lenders that file a 1099 form with the IRS are required to send you a 1099-C form by Jan. 31.

What is a Form 1099-C?

At its most basic level, a 1099-C reports a debt that was canceled, forgiven, never paid back or wiped out in bankruptcy. Here are some reasons you may have gotten a Form 1099-C:

• You cut a deal with your credit card issuer, and it agreed to accept less than you owed.
• You had a student loan, or part of a student loan, forgiven.
• You took out a personal loan and your lender forgave part, or all, of that loan.

The IRS requires banks and other creditors that forgive debts of $600 or more to file 1099-C forms because you’re required to pay taxes on that so-called income (unless you qualify for an exception).

Where does it tell me what debt caused me to get this form?

Look for an alphabetic “identifiable event code” in Box 6 on the form. It should match up with one of the eight codes (A-H) listed in these IRS instructions, each with a short description.

Do I have to pay taxes on the amount listed on my 1099-C?

Not always. The IRS will also get a copy of the tax form so you’ll have to include it on your return, but there are several exclusions and exceptions that can reduce the amount you owe – or exempt you from paying taxes on it altogether. Here are the most common ones:

• You filed for bankruptcy.
• Your debt was forgiven under the Paycheck Protection Program (PPP), which provided forgivable loans to businesses to help them survive during the COVID-19 pandemic.
• If you had mortgage debt forgiven before Jan. 1, 2021, you might not have to pay taxes on it. Thanks to the federal government’s Consolidated Appropriations Act, if you’ve had up to $750,000 in debt forgiven as part of a foreclosure, short sale, deed in lieu of foreclosure or loan modification you might not have to pay taxes on it (due to an extension of the Qualified Principal Residence Indebtedness exclusion through the 2025 tax year).
• You had a student loan that was canceled because you agreed to work for a set time period in a certain profession, including a doctor or teacher assigned to a low-income area.
• If you have suffered a total and permanent disability and had student loan debt forgiven because of this, depending on when your debt was discharged. If your student loan debt was forgiven after Jan. 1, 2018, it wouldn’t be considered income and you won’t have to pay taxes on it.
• You were “insolvent” at the time the debt was canceled, which basically means you were broke. This is typically the best option for people dealing with canceled credit card debt.

If you do qualify for an exclusion, you need to demonstrate it by filling out Form 982 and including it with your tax returns.

I was struggling financially when the debt was forgiven. Does that mean I was insolvent?

The IRS requires you to total up the fair market value of everything you owned at the time and compare it to the total amount of money that you owed. (You can use the insolvency worksheet in IRS Publication 4681, but it may be best to work with a tax preparer.)

If you owed more money than your assets were worth, then you were insolvent, and you can subtract the amount of insolvency from your taxable income.

Keep in mind that declaring insolvency may have future tax consequences (you may have to reduce the basis of your home or your investments when you sell them), so make sure to ask your tax adviser about that.

Sean Fox, co-president of Freedom Debt Relief in Phoenix, said most taxpayers who have debts forgiven can prove they are insolvent.

“If the taxpayer is in a verifiable state of financial hardship, forgiven debt is not included in gross income,” Fox said. “The reality is, if a consumer was not insolvent, they, in many or most cases, would not have had to turn to debt settlement in the first place.”

Does the 1099-C form mean my debt is canceled and can no longer be collected upon?

Receiving a 1099-C should always mean the debt is canceled and no longer subject to collection. But it may be up to you to make sure.

Until 2016, IRS rules allowed creditors to file a 1099-C if no payments had been made on a debt for 36 months. This resulted in many 1099-C forms being issued for debts that were delinquent but not actually forgiven. The IRS Taxpayer Advocate Service cited the resulting confusion in its annual reports to Congress as a priority for the agency to clear up.

Under an IRS rule change effective in November 2016, creditors are no longer expected to issue a 1099-C form merely because debt has gone 36 months without a payment.

If you receive a 1099-C for a debt you were not aware was discharged, clarify the status of the debt with the creditor. If they are following the old rule, request that they rescind the 1099-C under Internal Revenue Bulletin 2016-48, T.D. 9793.

Rescinding the 1099-C will alert the IRS that it was issued in error. If the creditor will not rescind the form or confirm the debt is forgiven, you will need to use the IRS dispute process outlined in Publication 4681 to show that no taxes are owed.

Why am I getting a 1099-C for old debt?

Unfortunately, creditors have a lot of wiggle room about when to report canceled income to the IRS. Statutes of limitations vary by state and by type of debt, but creditors are not required to file a 1099-C at that time since they can continue to try to collect on debt indefinitely.

Consumer advocates argue that under IRS guidelines, creditors should send a 1099-C three years after there has been no activity on the debt, but they acknowledge the rules are unclear. And plenty of taxpayers have been getting 1099-Cs for debt that’s many years – or even decades – old.

If this happens to you, first try calling the creditor.

“Sometimes when you go to the creditor, it turns out it was a mistake and they will issue an amended one,” said Greg Fitzgerald, an attorney who specializes in debt.

If that’s not the case, you will need to include the 1099-C on your tax return. A tax professional can then help you evaluate your options.

You can either try to explain to the IRS why it should have been filed a long time ago and make that case as part of your tax return. Or it may be easier to simply use one of the exemptions to avoid paying the amount.

However, the age of the debt can work against taxpayers, said Gary Bode, CPA. The time of financial hardship that caused the debt to go unpaid may have passed, leaving the taxpayer with a reduced ability to exclude the debt from income because of insolvency.

Where do I enter the information from a 1099-C on a tax form?

On a standard 1040 individual tax return, list the 1099-C information on Line 21 under “Other Income.” If you are planning to take any exclusions, you will also need to attach Form 982.

Note that you can’t use the short forms 1040EZ or 1040A if you’ve received a 1099-C because they don’t have a line for reporting the canceled debt.

What if there is a mistake on my 1099-C?

Unfortunately, mistakes are common. Often, the discharge date is wrong (some banks use a default date of Dec. 31 for any canceled debt from the calendar year), Bode said, and that can be important to correct if you want to claim you were insolvent at the time. If it’s mortgage debt, it’s not unusual for the stated value of your home to be inflated.

Start by asking the creditor for a corrected 1099-C. If your lender won’t revise the form, ask your tax preparer to make an adjustment on your tax return to correct the error, Bode said. You’ll need documentation, such as a letter showing the debt was discharged on a different date or a court record that shows your house sold at auction for much less than the amount listed by the bank.

What if I had a debt that was canceled or forgiven last year, but I didn’t get a 1099-C?

Even though you didn’t receive a 1099-C in the mail, failing to report the forgiven debt on your income tax return could result in a bill from the IRS or even an audit, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling.

First, try contacting the financial institution that settled the debt. If that doesn’t work, you can request a wage and income transcript for the tax year in question from the IRS. You can request it online or by calling 800-908-9946.

I co-signed on a forgiven loan and we each received a 1099-C for the full amount. Do we both have to pay taxes on it?

If you’re married and filing a joint return anyway, it should make no difference on your return. However, if you’re married and file separately or co-signed on debt with someone who is not your spouse, it gets much more complicated, said Jeffrey Pretsfelder, managing editor for Thomson Reuters Tax and Accounting.

In that case, state law will determine how you split the income and report it on your tax returns.

Some states assign it based on how much cash from the loan you each received, Pretsfelder said. Others look only at the percent of ownership of each party, which is typically 50-50.

Additional factors can also come into play, such as any interest deduction you each took from the debt or if one of you assumed responsibility for the debt in a divorce agreement. That’s why, in this scenario, it’s best to consult with a tax professional.

What happens to a 1099-C after death? Are surviving spouses responsible for any forgiven debt?

If someone’s debt is forgiven after they die, and they were the sole party to that debt, their estate is responsible for any taxes owed on the discharged amount, not their surviving spouse, according to Logan Allec, CPA and founder of Money Done Right.

The estate should report this amount on Form 1041, the tax return used for estates and trusts, said Allec. If the estate does not meet the exceptions laid out by the tax code, such as being insolvent, the income will be taxable.