Internal Revenue Service Form 1099-C, Cancellation of Debt, is sent to debtors from certain qualified creditors who have canceled debt for them during the tax year. In general, taxpayers receiving Form 1099-C must report the amount of canceled debt as income on their individual income tax returns for the year the debt is canceled. The Internal Revenue Code, though, does allows for some exceptions. Certain types of debt, such as bankruptcy, insolvency and qualified principal residence indebtedness, may be non-taxable.
Instructions for Recipients of Form 1099-C
Determine if the debt listed on Form 1099-C relates to bankruptcy under Title 11 of the United States Bankruptcy Code, an insolvency, qualified farm indebtedness, qualified real property business indebtedness, qualified principal residence indebtedness or certain indebtedness because of Midwestern disasters. If so, the amount of canceled debt may be excluded from your income.
Complete Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), if your canceled debt falls under one of the categories listed in Step 1.
File Form 982 with your Form 1040, U.S. Individual Income Tax Return, if your canceled debt falls under one of the categories listed in Step 1. Do not record the amount of canceled debt as income on your return. You do not need to complete Section 2.
Reporting Taxable Cancellation of Debt Income
Determine whether any amount listed in box 3 of Form 1099-C, "interest if included in box 2," would be deductible if paid. Some types of interest, such as student loan interest, may be deductible. If so, subtract the amount in box 3 from the amount in box 2. This is the amount of income you must recognize. If the amount in box 3 would not be deductible if paid, you must recognize the entire amount in box 2.
Input the amount of income your must recognize related to your cancellation of debt on the "Other Income" line of Form 1040. Do not include this amount in any calculation of self-employment income.
Include the amount of canceled debt input on the Other Income line of Form 1040 in your calculation of gross income when preparing your individual income tax return.