Canceled debt (also called forgiven debt) generally occurs when a lender forgives or writes off all or part of a debt the taxpayer legally owed. Under IRS rules, canceled debt is usually considered taxable income, unless the taxpayer qualifies for a specific exclusion.
Most canceled debt is reported to the taxpayer on Form 1099‑C, Cancellation of Debt.
Why It’s Taxable
When debt is canceled, the borrower receives a financial benefit—money they no longer have to repay. The IRS considers this benefit income, which must be reported on the tax return unless an exception or exclusion applies.
How It’s Reported
- Creditors issue Form 1099-C if they cancel $600 or more of debt.
- Taxpayers must report the canceled amount as “Other Income” on Schedule 1 (Form 1040), Line 8c.
- If an exclusion applies, taxpayers must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.
Example:
You owe $10,000 on a credit card. The lender agrees to settle for $4,000 and cancels the remaining $6,000.
- You must report $6,000 as taxable income unless you qualify for an exclusion.
TaxSlayer Navigation
Federal Section → Income → Other Income → Canceled Debt (Form 1099‑C)
- TaxSlayer will ask for:
- Creditor information
- Amount of canceled debt
- Date of cancellation
Exclusions are entered separately: Federal Section → Adjustments / Other Taxes → Form 982
Exceptions (Not Taxable)
Canceled debt may not be taxable if:
- It was discharged in bankruptcy
- You were insolvent (your debts exceeded your assets)
- It was a gift from the lender
- It was qualified principal residence indebtedness (e.g., mortgage forgiveness before Jan 1, 2026)
- It was a qualified farm or business real property debt
- It was a student loan forgiven under specific programs