If a lender canceled your debt while you were insolvent, you may be able to keep some or all of that canceled debt out of your taxable income. Use IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to claim the insolvency exclusion on your 2026 federal tax return.
The IRS also provides an Insolvency Worksheet in Publication 4681 to help you calculate how much of the canceled debt may be excluded. The worksheet helps with the calculation, but it isn’t a separate tax form that you file with your return.
What does it mean to be insolvent?
You were insolvent if, immediately before the debt was canceled, your total debts were greater than the fair market value, or FMV, of everything you owned.
Use this basic formula:
Total liabilities − FMV of total assets = Amount of insolvency
For example, suppose you had:
- $30,000 in total debts
- $24,000 in assets at fair market value
You were insolvent by $6,000 immediately before the debt cancellation.
When calculating insolvency, assets generally include everything you own. This includes property securing a debt and assets that creditors may not normally be able to reach, such as an interest in a pension plan or the value of a retirement account.
The timing matters. You must compare your debts and assets immediately before the cancellation, not at the end of the year or when you file your return.
How much canceled debt can I exclude?
You can exclude canceled debt only up to the amount by which you were insolvent.
Enter the smaller of:
- The amount of debt that was canceled; or
- The amount by which your liabilities exceeded the FMV of your assets immediately before the cancellation.
For example, if a lender canceled $10,000 of debt and you were insolvent by $6,000, you may exclude up to $6,000 under the insolvency exclusion. The remaining $4,000 is generally taxable unless another exception or exclusion applies.
How do I report the insolvency exclusion?
Attach Form 982 to your 2026 federal income tax return.
On Form 982:
- Check the box on Line 1b for a discharge of indebtedness to the extent insolvent.
- On Line 2, enter the smaller of the canceled debt or your amount of insolvency.
- Complete Part II if you’re required to reduce tax attributes, such as certain losses, credits, or property basis.
Receiving Form 1099-C doesn’t automatically mean the full amount is taxable. It means the creditor reported the canceled debt to you and the IRS. Form 982 is how you report a qualifying insolvency exclusion.
When doesn’t the insolvency exclusion apply?
The insolvency exclusion doesn’t apply to debt canceled in a Title 11 bankruptcy case. Bankruptcy has its own exclusion, which is also reported on Form 982.
For a bankruptcy discharge, you generally check Line 1a instead of Line 1b. The debt must have been canceled by the court or under a court-approved plan while you were under the court’s jurisdiction.
For qualified principal residence indebtedness, the IRS’s current Publication 4681 states that the residence exclusion generally isn’t available for discharges completed, or discharge agreements entered into, after December 31, 2025. A taxpayer who is insolvent may still need to consider the insolvency exclusion based on the rules in effect for the 2026 return.
Program Entry
- Select Federal Section.
- Select Income.
- Choose My Forms.
- Select Less Common Income.
- Open Cancellation of Debt (Form 1099-C, Form 982).
- Select Exclusions (Form 982).
Use the Insolvency Worksheet from Publication 4681 to calculate your amount before completing the Form 982 section.
What information should I gather first?
Gather records showing the amounts and fair market values immediately before the debt was canceled, including:
- Form 1099-C
- Credit card and loan balances
- Mortgage and vehicle loan balances
- Medical bills and other unpaid debts
- Bank and investment account values
- Home, vehicle, and other property values
- Retirement and pension account values
- Business assets and liabilities, if applicable
Keep the completed Insolvency Worksheet and supporting records with your tax files. They’ll help explain how you calculated the exclusion if the IRS asks for more information.
Additional information
For more details, review:
- IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
- IRS Form 982 instructions
- IRS Publication 908, Bankruptcy Tax Guide, if the cancellation involved bankruptcy
2026 tax-year note: As of September 1, 2026, the IRS webpage currently displays the 2025 edition of Publication 4681. Taxpayers filing 2026 returns in 2027 should use the final 2026 publication and Form 982 instructions when the IRS releases them.