To fill out Form 982, check the box in Part I that matches the reason your canceled debt qualifies for exclusion, enter the excluded amount on Line 2, then work through Part II to reduce your tax attributes by that same amount. Attach the completed form to your Form 1040 for the year the debt was discharged. The form is short, but each line depends on choices you make earlier, so the order matters.
What Form 982 Does
Canceled debt is generally taxable. If a lender forgives $15,000 you owed, the IRS treats that $15,000 the same as wages unless you can point to a specific exclusion in Internal Revenue Code Section 108. Form 982 is how you claim that exclusion. You need it any time you exclude canceled debt from income, even if the amount is small, and even if you never received a Form 1099-C from the creditor.
The form works in two steps. Part I identifies which of five exclusions applies and states the dollar amount you are excluding. Part II reduces specific tax attributes (net operating losses, credit carryovers, and the basis of property you own) to account for the break. You do not skip Part II. Filing Part I alone tells the IRS you took a tax benefit without paying its cost, which is not how Section 108 operates.
Pick the Right Exclusion in Part I
Part I has five checkboxes on Line 1. You check only one. If more than one exclusion could apply, pick the one most favorable to your situation. Bankruptcy has no dollar cap; insolvency is limited to the amount by which you were insolvent.
Line 1a — Title 11 Bankruptcy
The cancellation must be part of a discharge granted by a bankruptcy court under Title 11 of the United States Code. The court must have jurisdiction over the case and the debtor, and the discharge must be ordered by the court or result from a court-approved plan. If a creditor simply agrees to forgive your debt outside the court proceeding, the bankruptcy exclusion does not apply even if you are currently in bankruptcy.
Line 1b — Insolvency
You were insolvent if, immediately before the debt was canceled, your total liabilities were greater than the fair market value of your total assets. The exclusion is capped at the exact dollar amount of your insolvency. If you owed $200,000 and your assets were worth $150,000, you were insolvent by $50,000, and that is the maximum amount of canceled debt you can exclude even if the creditor forgave more.
The IRS defines assets broadly. You must include everything you own: bank accounts, vehicles, furniture, clothing, and retirement accounts and other assets that are exempt from creditor claims under state law. That last category catches many people off guard. Publication 4681 spells it out and contains an insolvency worksheet that lists every asset at fair market value against every liability, measured at the moment just before the cancellation.
Line 1c — Qualified Farm Indebtedness
The forgiven debt must have been incurred directly in running a farming business, not a personal loan that happened to be taken out by someone who farms. The lender must be someone regularly in the business of lending money, not a relative or friend. On top of that, at least 50 percent of your aggregate gross receipts over the three tax years before the discharge year must have come from farming.
Line 1d — Qualified Real Property Business Indebtedness
This covers debt secured by real property used in a trade or business, such as a commercial building or rental property. The amount you can exclude is limited to the excess of the outstanding principal (immediately before the discharge) over the fair market value of the property securing the debt, reduced by any other outstanding debt secured by that same property. C corporations cannot use this exclusion.
Line 1e — Qualified Principal Residence Indebtedness
This applies to mortgage debt on your main home forgiven through a foreclosure, short sale, or loan modification. The cap is $750,000, or $375,000 if married filing separately. For tax year 2025 returns filed in 2026, the discharge must have occurred before January 1, 2026, or the arrangement must have been entered into and evidenced in writing before that date. Legislation to extend this exclusion has been introduced in Congress but, as of early 2026, has not been enacted. If your mortgage debt was discharged on or after January 1, 2026, without a prior written arrangement, this checkbox is not available.
Enter the Excluded Amount on Line 2
Line 2 is the total amount of discharged debt you are excluding from income. It cannot exceed the limit for the exclusion you checked. For insolvency, that means no more than the amount by which you were insolvent. For qualified real property business debt, no more than the excess of principal over fair market value of the securing property. For qualified principal residence indebtedness, no more than $750,000 ($375,000 if filing separately).
Make sure the Line 2 amount is supportable against the figure your creditor reported on Form 1099-C, Box 2. A mismatch between these two numbers is one of the most reliable triggers for IRS correspondence. When the correct exclusion legitimately differs from the 1099-C amount, as often happens with insolvency, attach your insolvency worksheet so the reason is visible.
Reduce Your Tax Attributes in Part II
The trade-off for not paying tax on the canceled debt now is that you give up future tax benefits. The amount you excluded on Line 2 must be applied to reduce your tax attributes. For bankruptcy, insolvency, and farm debt exclusions, the reductions follow a mandatory sequence set by Section 108(b)(2):
- Net operating losses (Line 6), reduced dollar for dollar
- General business credit carryovers (Line 7), reduced at 33⅓ cents per dollar
- Minimum tax credits (Line 8), reduced at 33⅓ cents per dollar
- Capital loss carryovers (Line 9), reduced dollar for dollar
- Basis of property (Line 10a or 10b), reduced dollar for dollar, governed by Section 1017
- Passive activity loss and credit carryovers (Line 12), reduced dollar for dollar
- Foreign tax credit carryovers (Line 13), reduced at 33⅓ cents per dollar
Work down the list in order. If $20,000 of debt was excluded and you have a $15,000 NOL carryover, reduce the NOL to zero on Line 6 and apply the remaining $5,000 to the next attribute. Stop once the full excluded amount has been absorbed.
The basis-of-property reduction deserves extra attention because its effects show up years later. When you reduce the basis of an asset, you are lowering the starting point for calculating gain when you eventually sell it. Excluding $10,000 of canceled debt by reducing the basis of a rental property from $100,000 to $90,000 means more capital gains tax whenever that property sells. For bankruptcy and insolvency cases, Section 1017 limits the total basis reduction to the excess of your aggregate property bases over your aggregate liabilities immediately after the discharge. The IRS will not let basis be reduced so far that it creates a negative equity position on paper.
Before you fill out Part II, pull the current balances of any NOL carryovers, general business credit carryovers, minimum tax credits, capital loss carryovers, passive activity carryovers, and foreign tax credit carryovers, plus the adjusted basis of property you own. Those figures drive every line.
The Section 108(b)(5) Election on Line 5
The standard ordering rules force you to burn through NOLs and credit carryovers before touching property basis. If you have valuable NOLs you want to preserve, say from a business that is turning profitable, you can elect under Section 108(b)(5) to skip straight to reducing the basis of depreciable property. Check the box on Line 5 to make the election.
The election lets you apply any portion of the excluded debt to reduce depreciable property basis before any other attribute is touched. Whatever excluded amount the election does not absorb then goes back through the standard ordering rules. The total basis reduction under this election cannot exceed the aggregate adjusted basis of all your depreciable property as of the beginning of the tax year after the discharge.
Timing matters. The election must be made on a timely filed return, including extensions. If you filed on time without making it, you can still elect by filing an amended return within six months of the original due date (not counting extensions), writing “Filed pursuant to section 301.9100-2” on the amended return. Once made, the election can only be revoked with IRS consent.
If You File Through a Partnership or S Corporation
Partnership and S corporation debt does not work the same way. For a partnership, the exclusion and attribute reduction rules apply at the partner level. Each partner’s share of the canceled debt flows through, and each partner individually determines whether they qualify for an exclusion and files their own Form 982.
For an S corporation, the rules apply at the corporate level. The excluded amount does not pass through to shareholders under Section 1366(a). If your S corporation had debt discharged, the corporation files Form 982.
How and When to File
Form 982 cannot be filed on its own. Attach it to your federal income tax return (Form 1040 or 1040-SR) for the tax year in which the debt was canceled. For tax year 2025, that return is due Wednesday, April 15, 2026, unless you file for an extension to October 15, 2026.
If you are e-filing, confirm that your software generates the Form 982 data and transmits it. Not all packages handle this form automatically. For paper filers, place Form 982 directly behind your Form 1040 and any accompanying schedules so the IRS processing center can see why your return excludes income that a creditor reported on a 1099-C.
If you already filed without the form, you can submit an amended return on Form 1040-X. You generally have three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later. For the elections on Lines 1d and 5, the window is tighter: file the amended return within six months of the original due date.
Mistakes That Cause Problems
A dollar mismatch between Form 982 and the Form 1099-C is the most common issue. If your creditor reported $25,000 in canceled debt and you exclude $25,000 on Form 982, IRS automated systems will generally accept it. When the numbers do not match and no explanation appears, expect a letter. Attach the insolvency worksheet or other supporting math whenever the exclusion amount legitimately differs from the 1099-C amount.
Forgetting Part II is the next most common error. Every dollar excluded on Line 2 must show up as a reduction somewhere in Part II.
Claiming the wrong exclusion creates a different problem. If you check the insolvency box but your assets actually exceeded your liabilities, the exclusion does not apply. The IRS can recalculate your insolvency using different asset values, especially retirement accounts that taxpayers frequently leave off the worksheet. An adjustment here turns the entire excluded amount back into taxable income, so get the insolvency math right the first time.
Finally, ignoring canceled debt entirely does not make it go away. The IRS will match the 1099-C to your return and send a notice proposing tax on the full canceled amount. You can still respond then with Form 982 and supporting documents, but you have added months of correspondence to a filing that could have been handled on the original return.