Can You Write Off Debt on Your Taxes? 1099-C and Form 982

Writing off debt on your taxes is not something the tax code actually allows: you cannot deduct a credit card balance, a car loan, or a mortgage from your taxable income. The tax question that people usually mean when they ask this is the opposite one. When a creditor forgives what you owe, the IRS generally treats that forgiven amount as taxable income to you.¹ Several exclusions can erase that tax, but you have to qualify and file the right form. Two of the biggest exclusions look different in 2026 than they did a year ago.

Why Forgiven Debt Shows Up as Income

Borrowed money isn’t income because you owe it back. The moment a creditor releases you from that obligation, you’ve received an economic benefit equal to the amount forgiven, and the IRS taxes it like wages or freelance earnings.¹

The math is simple. Owe $15,000 on a card, settle for $5,000, and the $10,000 gap is cancellation of debt income. The same logic covers short sales, loan modifications that reduce principal, and any negotiated settlement where you pay less than you owed. The income is taxable in the year the cancellation happens, and you owe the tax whether or not the creditor sends you a form.²

Exclusions That Can Wipe Out the Tax

Federal law carves out five categories of canceled debt that can be kept out of your gross income.³ Each one requires you to file IRS Form 982 with your return. The most common mistake is assuming the exclusion is automatic; skipping the form is how people end up with an IRS notice proposing extra tax.⁴

Bankruptcy

Debt canceled through a Title 11 bankruptcy case (Chapter 7, 11, or 13) is fully excluded from income. You have to be the debtor in the case, and the cancellation has to come from the court or a court-approved plan.⁵ Solvency doesn’t matter, and there’s no cap.

Insolvency

If your total debts exceed the total fair market value of everything you own immediately before the cancellation, you are insolvent, and you can exclude the forgiven amount up to the size of that gap. Debts exceed assets by $40,000? You can exclude up to $40,000. Anything beyond the gap is still taxable.³

One detail trips people up. When measuring your assets, the IRS counts everything you own, including retirement accounts and pensions that creditors legally can’t touch.⁵ A $200,000 balance in a 401(k) counts. Many people who think they’re insolvent aren’t, once retirement money enters the picture.

Qualified Farm Indebtedness

Farmers have their own exclusion for debt tied directly to a farming operation. At least 50 percent of your average annual gross receipts over the three tax years before the discharge must come from farming, and the debt has to be owed to an unrelated lender actively in the lending business.³

Qualified Real Property Business Indebtedness

If you’re not a C corporation, you can exclude canceled debt tied to real property used in a trade or business and secured by that property. The exclusion is capped at the adjusted tax basis of the depreciable real property that secured the debt, so it can’t create or increase a loss. It works for landlords and small business owners with commercial real estate debt, but not for property held mainly for resale.³

The Mortgage Debt Exclusion Is Gone in 2026

For years, homeowners could exclude up to $750,000 ($375,000 if married filing separately) of forgiven mortgage debt on a primary residence used to buy, build, or substantially improve the home. As of January 1, 2026, that exclusion is no longer available.⁵

There is one narrow transition rule. If the discharge was made under a written agreement entered into before January 1, 2026, the exclusion still applies even if the actual forgiveness happens in 2026 or later.³ A short sale agreed to in writing in 2025 but closing in 2026 can still qualify. Without a written pre-2026 agreement, it doesn’t.

Homeowners whose mortgage debt is forgiven in 2026 without that transition rule should check the insolvency exclusion. It’s now the main fallback, and many people in foreclosure or short-sale situations do meet the test.

Student Loan Forgiveness in 2026

The American Rescue Plan Act’s blanket tax-free treatment for student loan discharges expired on December 31, 2025. Starting in 2026, forgiveness under income-driven repayment plans is generally taxable again.⁶

Two categories stay permanently tax-free. Public Service Loan Forgiveness is not treated as taxable income and was never affected by the ARPA provision.⁶ Discharges due to the borrower’s death or total and permanent disability, federal or private, are also permanently excluded.³

If you reach the end of an income-driven plan in 2026 and a balance is forgiven, that amount is taxable unless you qualify for insolvency or bankruptcy. Run the insolvency numbers well before the forgiveness date so a large tax bill doesn’t blindside you.

When Cancellation Isn’t Income at All

A few situations keep canceled debt out of income from the start, no Form 982 required.

A family member or friend forgiving a personal loan as a genuine gift, or a will releasing a debt owed by the beneficiary, is treated as a gift. The forgiver may have gift tax to think about; the person whose debt was forgiven does not owe income tax on it.⁵
A seller reducing the amount you owe on a purchase, when you’re not in bankruptcy or insolvent, is treated as a lower purchase price rather than forgiven debt.³
If paying the debt would have produced a deduction, canceling it doesn’t create income. A deductible business expense that gets forgiven has no net tax effect.³

Foreclosure: Recourse vs. Nonrecourse Debt

When property securing a debt is foreclosed on or repossessed, whether you were personally liable changes the tax picture.

With recourse debt, where you’re personally on the hook, the IRS splits the foreclosure in two. You’re treated as having sold the property for its fair market value, which produces a capital gain or loss. Then, if the remaining debt after the sale exceeds that fair market value, the excess is cancellation of debt income, potentially taxable unless an exclusion applies.¹

With nonrecourse debt, where the lender can take the property but can’t come after you personally, the entire outstanding debt is treated as the sale price. There’s no separate cancellation of debt income. You just compare the full debt amount to your adjusted basis to figure gain or loss.⁷ A recourse foreclosure can produce both a capital loss and a taxable income event in the same year; a nonrecourse foreclosure produces only a gain or loss calculation.

What to Do When a 1099-C Shows Up

Creditors who cancel $600 or more of debt are required to file Form 1099-C with the IRS and send you a copy.⁸ The form shows the amount canceled in Box 2 and the date. Getting one doesn’t automatically mean you owe tax on the full amount; it means the IRS knows about the cancellation and expects you to address it on your return.

If the canceled amount is taxable, you report it as other income on Schedule 1 of Form 1040.¹ If you qualify for an exclusion, you attach Form 982 showing why. Ignoring the form is the worst option: the IRS matches 1099-Cs against returns and sends notices when the amount doesn’t appear.

You also have to report cancellation of debt income even when no 1099-C arrives. Smaller creditors sometimes miss the filing, or a cancellation occurs without triggering the requirement. The tax follows the economic event, not the paperwork.²

If the 1099-C Is Wrong

Errors happen. A creditor might report the wrong amount, include interest or fees that were never really part of the debt, or issue a form for a debt you already paid. Contact the creditor and ask for a corrected 1099-C with the “corrected” box checked. If they won’t cooperate, report the correct amount on your return and attach a statement explaining the discrepancy. Reporting a lower number with no explanation almost guarantees an IRS notice, because the system flags the mismatch.

Form 982 and the Trade-Off You Accept

Form 982 is how you tell the IRS your canceled debt qualifies for an exclusion. You check the box for your situation (bankruptcy, insolvency, farm debt, business real property, or the mortgage transition rule), enter the excluded amount, and attach the form to your return.⁹

The trade-off is that you have to reduce certain tax benefits, called tax attributes, by the excluded amount. This blocks a double benefit where you escape tax on the forgiven debt and also keep every future deduction. Attributes are reduced in a set order that starts with net operating losses and net capital losses (dollar for dollar), moves through several credit carryovers (at 33⅓ cents per dollar), and includes property basis (dollar for dollar).⁹

For most individuals with consumer debt, the practical result is a lower basis in property you own. If you later sell that asset, the taxable gain will be a bit larger than it would have been. It’s not a second tax bill now, but some tax cost shifts into the future. The insolvency exclusion reduces attributes only up to the amount excluded; the business real property rule reduces the basis of the depreciable property that secured the debt rather than following the general order.³

1
Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not
2
Taxpayer Advocate Service. I Have a Cancellation of Debt or Form 1099-C
3
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
4
Internal Revenue Service. About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness
5
Internal Revenue Service. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
6
Taxpayer Advocate Service. What to Know About Student Loan Forgiveness and Your Taxes
7
Internal Revenue Service. Cancellation of Debt – Basics
8
Internal Revenue Service. About Form 1099-C, Cancellation of Debt
9
Internal Revenue Service. Instructions for Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness