What’s a Form 1099-C and Why Was I Sent One?
If you settled a debt for less than you owed, you may owe taxes on it
By Judy Malmon, J.D. | Last updated on January 27, 2023Use these links to jump to different sections:
For most taxpayers, figuring out our income tax is hard enough. Taxes based on money we never had? The concept is difficult to comprehend, never mind calculating the amount due each tax year.
Exclusions & Exceptions
“If you were insolvent the moment before the debt was forgiven, it’s not taxable income,” McLaughlin add. “Insolvency is defined as your liabilities exceed your assets.” However, you would still need to account for the write-off in other ways on your balance sheet. “There’s a sequence where you have to reduce your tax attributes of other assets, although it’s not income to you. For example, if you have a $100,000 debt forgiven, if you are solvent, that’s $100,000 of ordinary income. If you have $100,000 debt forgiven and you are insolvent, it’s not income, but you have to reduce other assets by $100,000.” A debt reduction or cancellation may also be excluded from taxable income if your debt comes under one of the following:- Bankruptcy
- Qualified farm indebtedness
- Qualified real estate business debt
- Qualified home loan that was discharged before January 1
- Qualified student loan forgiveness programs (e.g. working in a listed profession for certain employers for a designated amount of time, or providing health services in designated locations)
- Cancelled debt that would be tax deductible if paid
- Reduction in the purchase price provided by the seller
- Debt cancellation that is a gift, bequest, devise or inheritance
What do I do next?
Enter your location below to get connected with a qualified attorney today.Additional Tax articles
Attorney directory searches
Helpful links
Find top lawyers with confidence
The Super Lawyers patented selection process is peer influenced and research driven, selecting the top 5% of attorneys to the Super Lawyers lists each year. We know lawyers and make it easy to connect with them.
Find a lawyer near you