Cancellation of Debt Income & Form 982

My debt resolution company saved me a lot of money on my debts. Will I owe taxes on cancellation of debt income (CODI)?

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Debt Counseling - Couple
Bill's Answer: Answered by Mark Cappel

Will you owe the IRS any taxes if you receive a 1099-C? The short answer is, “it depends.”

You might wonder:

  1. Why you received a 1099-C
  2. How much in taxes, if any, you may owe
  3. If you can avoid paying taxes

Learn how to handle a 1099-C and how to calculate taxes you may owe. You might be able to avoid taxes by following a process the IRS calls cancellation of debt income (CODI). Read on to learn more about your 1099-C and how CODI might keep your tax bill under control.

What’s a 1099-C, and Why Did Someone Send Me One?

Under federal law, a person or business with “a significant trade or business of lending money” must send a taxpayer a “Form 1099C Cancellation of Debt” whenever it forgives or cancels a debt greater than $600. This may create a tax liability for you because the cancelled debt is considered “income” for tax purposes. The amount of debt forgiven must be reported on a IRS Form 982 (PDF) and this form must be attached to your tax return.

The organization that sends you a 1099-C may be a bank, credit union, or even a federal government agency (such as the USDA) that lent you money, then cancelled the debt. You might receive a 1099-C if debt settlement business such as Freedom Debt Relief negotiated a savings of more than $600 on a debt you had with a credit card issuer. A collection agent may not send you a 1099-C.

Fact The 1099-C is probably the most misleadingly named IRS form. Even though the IRS calls it the “1099-C, Cancellation of Debt”, this form does not mean the debt is forgiven, deleted, forgotten, or is no longer collectible. It is possible for an original creditor that issues a 1099-C to sell your account to a collection agent. The collection agent may collect a debt on which a 1099-C was issued.

How Much Do I Owe In Taxes?

You must include the amount mentioned in your 1099-C as income when you file your income taxes. As mentioned, you disclose the 1099-C information by completing a Form 982 and including the 982 the next time you file your income taxes. A 1099-C is not a tax bill, but it can have a significant impact on your tax situation if the amount is large.

Tip If your debts cause you financial distress, talk to a debt resolution partner to learn your options to resolve your debt.

How to Avoid Taxes Caused By a 1099-C With CODI

You may reduce or eliminate your taxes due through a procedure the IRS calls a Cancellation of Debt Income (CODI). CODI applies if you were insolvent immediately before the cancellation occurred. You calculate CODI by completing a Form 982.

For the purposes of completing Form 982, the IRS considers you insolvent if the total of all your liabilities exceeded the fair-market value (FMV) of all your assets. To determine insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of creditors under the law, such as interest in a pension plan and the value of a retirement account). Liabilities include:

  • The entire amount of recourse debts, and
  • The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt.

Here are two hypothetical examples the IRS uses to describe the cancellation of debt income concept:

Greg had an unpaid $5,000 credit card debt. Greg’s credit card lender sends him a Form 1099-C showing a cancelled debt of $5,000. Greg’s total liabilities immediately before the cancellation were $15,000 and the FMV of his total assets immediately before the cancellation were $7,000. This means immediately before the cancellation, Greg was insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets). Because the amount by which Greg was insolvent immediately before the cancellation exceeds the amount of his debt cancelled, Greg can exclude the entire $5,000 cancelled debt from income.

Now let’s change a few facts. Let us say Greg’s total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation were $7,000. In this example, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the cancelled debt exceeds the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 cancelled debt from income under the insolvency exclusion.

Cancellation of Debt Income Worksheet
  Total Liabilities   Asset Fair Market Value   Insolvency Amount
How Much Can Be Excluded From Income
How the IRS calculates your insolvency. Source: IRS &
Greg Example No. 1 $15,000  -  $7,000  =  $8,000
Because this exceeds the amount of cancelled debt, Greg can exclude the entire $5,000 shown on his 1099-C.
Greg Example No. 2 $10,000  -  $7,000  =  $3,000
Because this is less than the amount of cancelled debt, Greg can exclude only $3,000 of the $5,000 shown on his 1099-C.
You    -     =   
Note See IRS Publication 4681 for more information and instructions on how to complete a Form 982

More Information on Cancellation of Debt Income

The Internal Revenue Service document Publication 4681 contains more information on the tax consequences of cancelled debt. It also contains specific instructions on how to complete Form 982, and more hypothetical examples.

If you receive a 1099-C, keep it with your other tax documents. Give the 1099-C to your tax preparer, and give the tax preparer information regarding your total liabilities and the FMV of your assets as they were immediately before the cancellation.

Tip IRS problem? Talk to a tax resolution partner to learn how you can negotiate a settlement to your tax issue.

Mortgage Forgiveness Debt Relief Act

You may have heard about the Mortgage Forgiveness Debt Relief Act. MFDRA was in effect until the end of 2013. As of this writing, Congress has not extended MFDRA, but it did so in 2013 when MFDRA expired at the end of 2012. If your 1099-C relates to a mortgage debt cancelled in 2013 or before, MFDRA may apply to you.

The Mortgage Forgiveness Debt Relief Act provides tax relief for mortgage loans on primary residences forgiven in 2007 through 2013. See the IRS document The Mortgage Forgiveness Debt Relief Act and Debt Cancellation for more information. MFDRA does not help you with credit card or similar personal debts settled with a debt negotiation, consolidation, or resolution program.

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Comments (100)

Jerry G.
Pittsburgh, PA  |  April 08, 2014
This year, my wife received a 1099-C after a student loan debt was cancelled in 2013 for health reasons. Is this taxable income on the federal level? Should we have been paying quarterly taxes in 2013 if it was taxable?
April 10, 2014
Debt that was forgiven in 2013 will need to be included in the 2013 taxes. I don't believe that there is any need to pay estimated taxes on this kind of tax debt. I suggest that you speak with a tax professional, to see if you can avoid paying taxes on the forgiven debt. You have to meet the IRS standards for hardship, so see if the tax pro believes you meet that test.
Amanda M.
Dallas, TX  |  March 26, 2014
If I borrowed $1million to buy a building & my note was forgive by $300,000 & at the time the building was worth $700,000 and I had $50,000 cash on hand. How much COD income must I recognize?
March 27, 2014
Your hypothetical does not provide enough information to answer your question. What are your total assets? What are your total liabilities?

Review the two hypothetical situations in the original answer above to understand how to do the math on a CODI question.
Di N.
Durham, NC  |  March 24, 2014
I have received 2 1099-C. One is for a total of $70K and the other says "Corrected and $0 amount". The student loan is from almost 10 years ago. My parents went thru bankruptcy and now it says canceled. I'm confused on what to do. What form do I use for my taxes?
March 24, 2014
From what you described, the best advice I can give you is to take the two 1099-Cs to a tax professional for review. The potential tax exposure for not properly declaring $70,000 in income is too great to rely on the advice of someone online.
Phyl M.
Fletcher, NC  |  March 14, 2014
I received a letter from the IRS today saying that I did not file a 1099C with my 2012 taxes. They had the loan number on the back from 1st Citizens bank. Amount $6999. Which they added to my 2012 taxes.I have no loans with Frist Citizens, so I called the bank. This loan was from 1995,,,,almost 18yrs ago, and it was a loan that my ex was to pay for solely as per the divorce decree.. but I got a bill for $1800. First of all.... REALLY 18yrs later, and secondly, why should it solely be MY responsibility. Just a few questions I have about this confusing thing....
March 21, 2014
Consult with a tax lawyer to learn if the 1099-C issue was filed in a timely manner. I agree, 18 years seems like a long time to raise a tax issue, and confess I do not know if there is something like a statute of limitations rule that applies in your particular circumstances.
Brit G.
Erieville, NY  |  February 05, 2014
I received a 1099-C cancellation of debt letter. Does that mean they will take my tax return?
February 05, 2014
You're jumping ahead a few steps to something you can avoid easily. A tax offset, which is what the federal government calls a tax return garnishment, may not be in the cards for you.

Complete an IRS Form 982 with your next federal income tax return to learn how your 1099-C may impact you. Consult with a tax preparation professional to learn if CODI can help you avoid tax liability.
Tom W.
Williamsport, PA  |  January 28, 2013
I just received two 1099-C forms from Bank of America for the same credit-card account, the first discharging some $3,900 in debt for which "borrower was personally liable" ... and a corrected form a day later, reducing that amount to zero and saying the borrower was NOT liable. Can I assume that I needn't claim this as income? And can the creditor still try to collect after discharge? Thank you very much for your consideration and assistance.
January 29, 2013
Without knowing more about your financial situation and the $3,900 debt, we won't venture a guess what the two 1099-Cs mean. Did you file for bankruptcy, which discharged the Bank of America debt? Is this a case of mistaken identity or identity theft? Did you reach a settlement agreement with BofA about the account?

Your best course of action is to take the 1099-Cs to a tax professional: certified tax preparer, CPA, enrolled agent, or tax lawyer. He or she will ask the questions mentioned here, plus many more about your financial and tax history.

Regarding your second issue, unfortunately, an original creditor is permitted to issue a 1099-C and continue to pursue the consumer to collect the debt. Alternatively, the original creditor is permitted to issue a 1099-C and sell the debt to a collection agent. If you later settle the debt, you may need to file an amended tax return.
Nei A.
Plantation, FL  |  April 10, 2012
Bill, I received three 1099-C for year 2011, one for each of the last quarter of the year. My question is, since the date of cancellation are different: Do I have to file a form 982 for each one of them or can I combine them all in one?
April 11, 2012
I recommend that you have a tax professional review the documents and instruct you how to fill out the IRS tax form 982.
Robert M.
April 14, 2012
You have to figure the extent of your insolvency separately just prior to each of the cancellations (i.e. you have to fill in 3 worksheets). For the first debt cancellation, you still owed the other two, so these would be included in your liabilities for the first. For the second cancellation, only the third one can be included as a liability and for the third, none of them would be included. More than likely, your other assests didn't change much from the first to the third cancellation, so some entries may be the same on all 3 worksheets. One thing that would change is your cash on hand (e.g. checking and savings account balances). Also, any IRA's or 401K's you have would likely ave changed value. Just fill out 3 worksheets.
Lisa B.
Houma, LA  |  March 31, 2012
Bill, can't seem to find the answer I'm looking for. I live in Louisiana. The consent judgment/community property settlement had my ex-husband responsible for certain credit card debts. He then was discharged through bankruptcy in August 1998, which he included the credit cards he was responsible for. One credit card company decided that since I was an authorized user, the account changed to an individual account under my name and discharged as bad debt. My credit report was flagged as consumer disputes charge. The account was sold twice, seen this on my credit report. Back in 2008, I reviewed all 3 credit agencies, the accounts were not listed on the credit reports. About 3 weeks ago I get a 1099-C from the last company that bought the debt, stating date canceled 12/15/11. Was I even legally responsible for this debt, after the community property settlement?
April 01, 2012
In general an authorized user is not responsible for the debt on the account. I recommend that you speak with a tax professional and show him the paperwork including the 1099-c and documents showing that you were an authorized user.
Judy G.
Tacoma, WA  |  March 26, 2012
Occasionally I am able to get one of my credit card companies to reverse a late charge, or my bank to reverse an overdraft fee. Are these also considered taxable forgiven debts?
March 26, 2012
Interesting question. One can create a convincing argument either way. Have you been issued a 1099-A or 1099-C for these items? If not, do not let them concern you.
Berta W.
Amissville, VA  |  March 04, 2012
Hi Bill, I had a COD and based on the insolvency worksheet in Pub.4681, I am insolvent for the full amount of debt canceled (100k of student loans). I have indicated this on Form 982 but it states that I also must reduce my Tax Attributes in Part II. Is it possible that I do not have any tax attributes? I do not own a business, or property. I earned a negligible amount of money, on which I owe no taxes, nor am owed a refund. What is the Tax Attribute called "minimum tax credit"? Does that mean that my standardized deduction for next year is reduced by a portion of this year's COD? If not, how do I note on Form 982 that I do not have any Tax Attributes? Thank you!
March 07, 2012
You need to address your excellent and complex questions to a tax professional. I can't give tax advice, but will share some thoughts with you about the issues your questions raise.

The minimum tax credit tax attribute is a credit carryforward if you paid alternative minimum tax in a prior year. Generally, this credit arising from when taxpayers incur alternative minimum tax from items whose timing is different when computing the alternative minimum tax and regular taxes.

Most taxpayers have at least some personal-use property (tax attribute number 5 to be reduced). This includes cars, home furnishings, electronics, etc. Reduce the tax attributes (original cost basis of property) of this class of items by the COD amount. If, however, total liabilities after the COD exceed the basis in their personal-use property, no reduction is required according to IRC 1017(b)(2). So, for example, if you still have credit card debt and auto loans of $20,000 and your basis in all personal-use property is $15,000, no reduction of basis would be required. In this case, you would show the detail on the reduction of tax attributes statement – lisingt out personal-use property and each item’s cost basis, then detailing all remaining liabilities after the COD. If the total basis in personal-use property exceeds total liabilities, show the detail on the statement but reduce the basis in each item proportionally.

Again, please discuss this with a tax professional.
Curious L.
San Antonio, TX  |  March 07, 2012
Please notice that Bill indicated "basis" in assets for the reduction of tax attributes calculation. This is a different number than what you used to calculate your original insolvency. Basis is typically (but not always) cost. So instead of using the resale value of your car (FMV) now you would use how much it cost you to buy it originally. The reduction of tax attributes portion of this exclusion process is the most complicated, so please get professional assistance. If your facts are really as straight-forward as you mention then it shouldn't take you long to get an answer.
Berta W.
Amissville, VA  |  March 12, 2012
Dear Bill and Curious L., First of all, THANK YOU for your very informative answers. I've spent a great deal of time searching for information about IRS Form 982 and I've found lots of comments about 1099-C's, Form 982 in general, and even exclusionary cases (like insolvency) but with the exception of your excellent comments, I have found very little about reducing tax attributes as it pertains to Part II of Form 982. This includes advice I sought from an agent at a local (franchise-owned) tax preparation firm. Rest assured, I will be seeking the expertise of another tax professional. That said, may I 'pick your brain' just once more? The BASIS (thanks, Curious!) of my personal-use property (no more than 10k) is far below my liabilities AFTER my cancellation of debt (still owe another 60k in student loans). Based on this (as I understand it), no reduction of tax attributes is required in Part II of Form 982 (according to IRC 1017(b)(2)). How do I indicate this on my taxes? What exactly does a "statement" to the IRS with this sort of information look like? I did find a legal aid society that posted an example of a letter to the IRS that allows one to document specific monetary amounts to justify insolvency. Would it be appropriate to use a letter such as this and modify it to say that I am justifying why I have no reduction in tax attributes? Again, thank you so much!
Curious L.
San Antonio, TX  |  March 12, 2012
Again, please rely on a tax professional. Follow the instructions for the forms that you are completing. If they require that additional schedules be submitted, then do so. Whether or not they are required submissions is separate from whether or not you should retain them for your records in the event that you are audited. Let me know if you have any other questions. Hope everything works out for you.
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