Form 1099-C (Cancellation of Debt)

Why it matters

When a debt is canceled — for example, through a settlement for less than the full balance, or a charge-off the creditor stops pursuing — the forgiven amount can be treated as taxable income in some situations, which is why a 1099-C matters at tax time. Important exceptions and exclusions may apply, such as debts discharged in bankruptcy or amounts canceled while you are insolvent, and the rules are detailed and fact-specific. Receiving a 1099-C does not by itself decide what you owe in tax, and a form can sometimes be issued in error or for the wrong year. Because tax treatment depends on your individual circumstances, this is general education only, and a qualified tax professional can review a 1099-C and explain how it applies to your return.

Example

Grace settles a $6,000 credit card debt for $2,500, and the creditor cancels the remaining $3,500. Because more than $600 was forgiven, the creditor sends her a Form 1099-C and files one with the IRS. Whether that $3,500 counts as taxable income depends on exceptions like insolvency that could apply to Grace. Rather than guess, she brings the form to a tax professional to determine how it affects her taxes.