Do I Have to Pay Taxes if I Get a 1099-C Form? What You Need to Know

No one wants to see extra tax forms in the mailbox, particularly if you don’t know what they mean. 

If you’ve completed a debt settlement program or qualified for student loan forgiveness, you’re no longer obligated to repay the canceled debt. However, you may have to pay income taxes on the total canceled debt. That’s where the 1099-C Cancellation of Debt notice comes into play.

If you’ve had more than $600 canceled, your lender must send a 1099-C Cancellation of Debt notice

Any lender that cancels taxable debt worth $600 or more must file a 1099-C form with the Internal Revenue Service (IRS). The lender must also send you a copy of this form. If you get one, don’t panic. Put this away in a safe place. You will need it when you complete your federal income tax return.

Eligible canceled debt includes debt settlements, student loan forgiveness, abandonment of secured property and foreclosure, among others. The amounts reported on the 1099-C may include principal, interest, penalties and late fees. 

If your forgiven debt does not fall into an excluded category, you may have to pay debt forgiveness tax or file a separate form showing financial insolvency.

For example, let’s say you had $25,000 in credit card debt and reached a debt settlement in which you agree to repay $12,500. This means you aren’t repaying $12,500 and that debt is considered canceled. In this instance, you should receive a Form 1099-C reporting that remaining $12,500 to the IRS and it may be considered taxable income. However, particularly in debt settlement, there can be exemptions for people who aren’t financially solvent. 

If your forgiven debt falls into an excluded category, you may not have to pay any additional taxes at all.

READ MORE: Payday loan relief and debt consolidation

Exclusions and exemptions

If your debt falls into an excluded category, you won’t need to include it as regular income on your tax filings.  

Pro tip: Debt cancellation may also be called “Discharge of Indebtedness.”

Common exclusions include:

  • Amounts canceled as gifts
  • Inheritances
  • Some student loans
  • Some student loan repayment or forgiveness programs 
  • Canceled debts that would have been tax deductible

The IRS allows these canceled debts to be excluded from gross income:

  • Chapter 11 bankruptcy filings
  • Insolvency
  • Qualified farm indebtedness
  • Qualified real property business indebtedness
  • Qualified principal residence indebtedness (that is evidenced in writing before Jan. 1, 2026)

Pro tip: Form 1099-C should be received by Jan. 31 of the tax year after the debt was canceled. When it arrives, carefully review the information and if it seems incorrect, contact the lender.

Form 982: How to prove insolvency

A taxpayer is considered insolvent when his or her total liabilities exceed the total assets. In situations where the filer is insolvent (debt settlement cases, for example,) it’s possible to have the forgiven debt excluded as income.

For example, if your total liabilities are $20,000 and your total assets at the time are $16,000, you are insolvent in the amount of $4,000.

Pro tip: When calculating your assets’ value, use fair market value (think auction or garage sale pricing) rather than what you actually paid for the items or what you think they might be worth.

According to the Internal Revenue Service, taxpayers are not required to include forgiven debt as income if the taxpayer can show insolvency. To do that, you must complete and file Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment.) Despite the long title, it’s a short form.

To learn more about how insolvency is calculated, check out this video:

You must report the forgiven debt on your income tax return

When you complete your federal tax return, you’re supposed to report canceled debts as ordinary income. This is true regardless of whether your lender sent you a Form 1099-C. Even if the debt is lower than $600, the threshold that requires the lender to file the form, you are still supposed to report it on your Form 1040 under Schedule 1, other income. 

Canceled debt will be added to your taxable income, and you might have to pay debt forgiveness taxes.

Pro tip: This is not a separate tax on canceled debt. The total amount of debt canceled will be rolled into your tax return as income, but the tax you actually owe will be based on several factors, including total income, deductions, tax credits, and money that has been withheld from your paychecks.

You may not owe income taxes just because you report canceled debt. It’s possible you’ll even get a tax refund. You may owe more tax than usual if the debts that were canceled significantly boost your taxable income. 

What happens if you receive a 1099-C and aren’t required to file a tax return?

If you get a 1099-C and aren’t required to file income tax returns, you don’t need to do anything at all. Because your income is small, it’s not likely that the IRS will follow up.

If the IRS does send you an inquiry, you’ll need to send a letter and include a completed Form 982. You will also need to include:

  • A Statement of Assets and Liabilities: List what you own and the price it would sell for at an auction or garage sale
  • Your Social Security number

Pro tip: Though there is a chance the IRS could respond and ask you to file a tax return, it’s very unlikely. If that happens, please contact a tax professional.

Common examples of debt cancellation

Cancellation of debt may sound complicated, but it is simple to understand. If you had a debt and you didn’t have to repay a portion of it, that debt is considered “canceled” or “forgiven.”, You no longer owe that money. However, you may still have to pay income tax on that debt. Some examples of debt cancellation include:

  • Debt settlement: Debt settlement is a debt relief strategy that involves working out an agreement to pay your creditors less than the full amount you owe. If you (or a third-party debt settlement company) negotiate a credit card debt settlement, the total amount discharged may be considered taxable income.

READ MORE: What is debt settlement?

  • Student loan forgiveness: There are a number of student loan forgiveness programs that will reduce the amount of money you owe based on your career field and countless other factors. Any amount discharged by these programs may be considered taxable income.

Pro tip: The American Rescue Plan makes student loan forgiveness through Dec. 31, 2025, tax-free, so any canceled student loan debt through that date is not considered taxable income.

  • Mortgage modifications: Homeowners whose mortgage debt is partly forgiven through a loan modification that allows them to continue owning the residence will get a Form 1099-C reporting the amount of debt that was discharged.

Other common reasons for 1099-C forms include the following:

  • Foreclosure
  • Returning property to a lender
  • Repossession

What to do when you get a 1099-C form

Whenever you get a 1099-C form, put it in a safe place, particularly if it arrives outside of tax season. If a certified public accountant (CPA) or other tax preparer completes your returns, make sure to notify them and give them a copy.

If you think you qualify for an exemption or there is another reason your canceled debt should not be included as taxable income, you’ll have to file an extra tax form, Form 982. This tells the IRS why your debt should be excluded.

Pro tip: Tax filings can be complicated. If you’re not sure how to proceed, talk to a qualified tax preparation professional. After all, no one wants to pay more than they owe.

If you’re worried about the extra cost of professional tax preparation, the IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) programs offer free tax help for qualified taxpayers. 

Who gets copies of Form 1099-C?

There are three copies of the 1099-C.

  • One goes to the IRS
  • One goes to you
  • The third is retained by the lender

What happens If you never get a 1099-C?

Anyone with canceled debt over $600 should get the 1099-C. However, if you don’t get one, you’ll need to contact your lender. Even if your lender failed to report the canceled debt to the IRS, you’re still obligated to list it on your federal tax returns. If you don’t know the total amount of your canceled debt, contact your creditor or debt settlement company. 

If the lender mailed the form but you lost it, contact the lender and ask for a copy. 

What if you got a 1099-C but didn’t include it on your federal tax return?

If you get a 1099-C form — or have gotten one in the past — but did not include the forgiven debt when you filed your tax return, you’ll need to amend your return with Form 1040X.

Pro tip: In this case, be prepared to pay back taxes or work out a payment plan with the IRS.

What If the canceled debt is less than $600?

Even if you don’t get a Form 1099-C and your canceled debt was less than $600, it should be reported as income on Form 1040: Schedule 1 under Other Income.

What if you receive a 1099-C for an old debt?

While debt has a statute of limitations, it does not apply to 1099-C forms, so you may receive one for a very old debt. 

If you get a form outside of the calendar year in which it was canceled, you have a few options, most of them complicated. You may:

  • Qualify for an exemption
  • Need to amend an old tax return
  • Be able to remedy the issue on your current tax return

If you receive a form for an old debt, it may be worth contacting a tax professional to or seek legal advice

The bottom line

Just because you receive Form 1099-C in the mail doesn’t mean you’ll have to pay income taxes on your forgiven debt. However, you will either need to include forgiven debt on your federal tax return, or you will need to file a Form 982 to show that you’re insolvent. It’s important that you know what the various documents are for and what you need to submit. You don’t want to end up paying more than your fair share.


What is the difference between Form 1099-A and 1099-C?

IRS Form 1099-A and 1099-C are two different income tax forms, but both are used to report different types of debt cancellations or acquisitions to the IRS. Here are the differences between the two forms:
Form 1099-A is used to report the acquisition or abandonment of secured property that is used for business or investment purposes.
Form 1099-C is used to report cancellation of debt of $600 or more.
Reporting Entity:
Form 1099-A is issued by a lender or other entity that acquires an interest in secured property through foreclosure or abandonment.
Form 1099-C is issued by a lender or creditor that cancels a debt owed by a debtor.
Information Reported:
Form 1099-A reports the acquisition or abandonment of secured property and includes information such as the date of acquisition or abandonment, the fair market value of the property, and the outstanding principal balance of the loan.
Form 1099-C reports the cancellation of debt and includes information such as the amount of debt canceled, the date of cancellation, and the reason for cancellation.

What is a discharge of indebtedness?

Discharge of indebtedness refers to the cancellation or forgiveness of a debt by a creditor or lender. When a debt is discharged, whether through debt settlement, repossession or foreclosure, bankruptcy, or student loan forgiveness programs, the borrower is no longer responsible for repaying the debt, and the creditor cannot take any legal action to collect the debt.

Does TurboTax help with Form 1099-C?

Yes, TurboTax can help you with Form 1099-C, which is used to report canceled debt to the IRS. When you enter your tax information into TurboTax, the popular tax preparation software will guide you through the process of entering the information from the form.
TurboTax will ask you for the amount of canceled debt, the date it was canceled, and the reason for the cancellation. Based on this information, TurboTax will determine if the canceled debt is taxable or if you qualify for an exclusion or exception from taxation.
If you have multiple Forms 1099-C, TurboTax will help you enter all of the necessary information and calculate the total amount of canceled debt for the year.

Will income tax debt show up on my credit report?

Yes, if you owe federal income taxes, it is possible for the debt to show up on your credit report. The IRS has the authority to file a tax lien against your property in an effort to collect payment. That tax lien is a legal claim against your property. The tax lien may show up on your credit report and could negatively impact your credit score.
However, the IRS typically does not report tax debts to credit bureaus. Instead, the tax lien itself can impact your credit report. Additionally, if you are unable to pay your tax debt and the IRS places the debt in collections, the collection agency may report the debt to the credit bureaus as a delinquent account.

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