Understanding Form 1099-C: Reporting Canceled Debt to the IRS

Definition

Form 1099-C is the official document used to report canceled or forgiven debt to the IRS, indicating that a taxpayer is no longer obligated to repay the forgiven amount.

What Is Form 1099-C: Cancellation of Debt?

Lenders are required to file Form 1099-C with the IRS when they cancel $600 or more of a borrower's debt. Since the borrower keeps this forgiven amount, the IRS generally treats it as taxable income.

Therefore, taxpayers must report this income on their tax returns and pay any applicable taxes. Additionally, lenders must provide a copy of the form to the debtor.

Key Points to Remember

• Form 1099-C reports canceled debts of $600 or more, which the IRS typically counts as income.
• Certain canceled debts may be exempt from taxation.
• Lenders usually send the form both to the IRS and the debtor.
• Even without receiving a 1099-C, taxpayers should report canceled debts on their tax returns.

How Does Form 1099-C Work?

This form notifies both the IRS and the debtor that a debt of $600 or more has been forgiven. Common scenarios include canceled credit card balances, vehicle repossessions, or property foreclosures.

Special considerations apply when a lender repossesses property in exchange for canceling debt. The IRS treats this as if the debtor sold the property to the lender if the loan was secured and the debtor was personally liable.

In such cases, the property's fair market value is subtracted from the forgiven debt, and the remaining amount is taxable as ordinary income. Lenders should also issue Form 1099-A in these situations.

For example, if you owed $3,000 on a credit card and the lender cancels the debt due to financial hardship, this amount must be reported on Form 1099-C and included in your taxable income.

When Is Form 1099-C Not Required?

Lenders must send Form 1099-C to debtors by January 31 following the year the debt was canceled or property repossessed. Debts under $600 typically do not require this form.

However, taxpayers are still obligated to report any canceled debt, even if it’s as little as $1, since it represents income.

Some debts are exempt from taxation and thus do not generate a 1099-C, including debts discharged through bankruptcy and nonrecourse loans where the borrower is not personally liable.

Under the American Rescue Plan, student loans forgiven between January 1, 2023, and December 31, 2025, are not taxable and do not require Form 1099-C. The Public Service Loan Forgiveness Program also exempts certain government and nonprofit employees.

Details Included on Form 1099-C

The form contains comprehensive information about the canceled debt. The left side identifies the lender and debtor, while the right side includes labeled boxes with details such as:

1. Date the debt was forgiven
2. Amount of the canceled debt
3. Interest included in the debt
4. Description of the debt
5. Whether the debtor was personally liable
6. Reason for filing the form (e.g., debt over $600)
7. Fair market value of any property involved in foreclosure

The debt account number is noted at the bottom left of the form.

All versions of Form 1099-C are available on the IRS website.

Filing Your Tax Return with Form 1099-C

The forgiven debt amount appears in Box 2 of Form 1099-C and must be reported as "Cancellation of debt" on line 8c of Schedule 1, which accompanies your tax return.

Schedule 1 aggregates other income sources, with the total transferred to line 8 of Form 1040.

There is no need to attach Form 1099-C to your tax return since the IRS already has a copy.

Final Thoughts

The IRS requires that all income, including forgiven debt, be reported and taxed accordingly. Form 1099-C serves as an official notification of canceled debt. If you don’t receive the form due to moving or other reasons, or if your canceled debt is under $600, you are still responsible for reporting it.

If you believe you should have received Form 1099-C but didn’t, or if you received one for debt you didn’t expect to be forgiven, contact your creditor for clarification.

You can file an amended tax return if you discover an error or omission regarding canceled debt after submitting your original return.

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