If a debt is canceled, forgiven, or discharged and you no longer have to repay it, the forgiven amount is generally considered taxable income. In many cases, you'll receive Form 1099-C, Cancellation of Debt, reporting that amount.
However, there's an important exception. If the debt was discharged through a Title 11 bankruptcy case, you can generally exclude the forgiven debt from your taxable income by filing Form 982 with your tax return.
What Is a Title 11 Case?
A Title 11 case is a bankruptcy proceeding filed under Title 11 of the U.S. Code, which governs federal bankruptcy law.
For the exclusion to apply:
- You must have been under the jurisdiction of a bankruptcy court.
- The debt must have been discharged by the court, or under a court-approved bankruptcy plan.
If you filed for bankruptcy and had debts eliminated, your bankruptcy attorney or the court that handled your case can help you determine whether the canceled debt qualifies for this exclusion.
How Much Forgiven Debt Can Be Excluded?
In most cases, the entire amount of debt discharged through a qualifying Title 11 bankruptcy proceeding can be excluded from income.
To claim the exclusion, you'll generally need to complete Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and include it with your federal tax return.
Keep in mind that excluding canceled debt under bankruptcy rules may require certain tax attribute reductions, as outlined on Form 982 and in the IRS instructions.
How to Enter Form 982 in Your Account
To report a qualifying discharge of indebtedness and complete Form 982:
- Go to Federal.
- Select Income and choose Select my forms.
- Select Less Common Income.
- Choose Cancellation of Debt (1099-C, Form 982).
- Select Exclusions (Form 982) and follow the prompts.
Need More Information?
For additional details about Form 982, canceled debt exclusions, and the reduction of tax attributes, see the IRS instructions for Form 982 and related guidance before filing your return. This can help ensure you're reporting discharged debt correctly and claiming any exclusion you're entitled to receive.