How to Fill Out Form 982: Insolvency, Elections, and Attributes

To fill out Form 982, check the box in Part I that matches your exclusion, enter the amount of canceled debt you are excluding on Line 2, then work through Part II to reduce your tax attributes in the order required by federal law. The form is one page, but each line has a specific role, and the numbers you put on it are constrained by whichever exclusion you claim under Section 108 of the tax code.

What to Gather Before You Start

Download the current version of Form 982 from the IRS website. The most recent revision is dated December 2021 and remains current for 2026 filings.¹

Pull together three things:

Every Form 1099-C you received. Lenders send this whenever they cancel $600 or more of debt, and Box 2 shows the forgiven amount. You may have more than one.²
IRS Publication 4681, which contains the insolvency worksheet and walks through each exclusion.³
A complete list of your assets and liabilities valued as of the day immediately before the debt was canceled.

If a 1099-C never arrived, canceled debt still has to be reported as gross income unless an exclusion applies.³ Missing paperwork does not remove the obligation.

Running the Insolvency Calculation

Most individuals filing Form 982 rely on the insolvency exclusion, and the number produced by the insolvency worksheet caps how much you can exclude. You were insolvent to the extent your total liabilities exceeded the fair market value of your total assets immediately before the cancellation.⁴

On the liability side, add up mortgage balances, car loans, credit card debt, student loans, personal loans, medical debt, past-due taxes, and any other obligation. On the asset side, list the fair market value of cash and bank balances, retirement accounts including IRAs and 401(k)s, vehicles, real estate, jewelry, furniture, and any other property with value.⁵ Use fair market value, not purchase price. For a vehicle, that means current resale value. For a home, a recent appraisal or comparable sales figure.

Subtract total assets from total liabilities. A negative result means you were solvent and the exclusion does not apply. A positive result is your insolvency amount, and that is the ceiling on your exclusion. If a lender forgave $15,000 but you were only insolvent by $9,000, you exclude $9,000 and the remaining $6,000 is taxable.

This is the number the IRS scrutinizes most closely on audit. Be conservative with asset values rather than inflating liabilities or undervaluing what you own, and document how you arrived at each figure.

Part I, Line 1: Picking the Right Box

Part I opens with checkboxes on Lines 1a through 1e. Check only one unless you had different types of discharged debt qualifying under different exclusions.

Line 1a covers debt discharged in a Title 11 bankruptcy case. This exclusion has no dollar cap. If the debt was canceled in bankruptcy, you must check this box even if you would also qualify under insolvency.⁶
Line 1b covers insolvency outside bankruptcy. This is the most common box for consumers with canceled credit card debt, medical bills, or personal loans.⁴
Line 1c covers qualified farm indebtedness. The debt must be directly connected to your farming business, at least 50% of your gross receipts over the three preceding tax years must have come from farming, and the discharge must have been made by a qualified person.⁶
Line 1d covers qualified real property business indebtedness. Checking this box is an election to apply the exclusion this way rather than following the default rules.
Line 1e covers qualified principal residence indebtedness, meaning mortgage debt on your main home canceled through foreclosure, short sale, or loan modification. The maximum exclusion is $750,000, or $375,000 if married filing separately. For 2026 filers, this exclusion only applies to debt discharged before January 1, 2026, or under a written arrangement entered into before that date.⁴

If you qualify for both insolvency and the mortgage exclusion, you can choose which to use. Insolvency has no dollar cap but triggers the full attribute reduction described below. The mortgage exclusion is capped but reduces only the basis of your home.

Part I, Line 2: Entering the Excluded Amount

On Line 2, enter the total canceled debt you are excluding. If you received multiple 1099-Cs in the same year, add up the amounts that qualify and enter the combined total.⁴

The figure is not always what appears on the 1099-C. Each exclusion has its own cap:

Bankruptcy under Line 1a has no dollar limit. The full discharged amount can be excluded.
Insolvency under Line 1b is limited to the extent of your insolvency. If you were insolvent by $7,000 but the 1099-C shows $10,000, enter $7,000.⁶
Qualified farm indebtedness under Line 1c is limited to the sum of your tax attributes and the basis of property used in your farming business. Any excess is taxable.⁶
Mortgage debt under Line 1e is limited to $750,000, or $375,000 if married filing separately, for discharges before 2026.⁴

If you checked Line 1d, enter the qualified real property business debt exclusion on Line 3. That figure flows into Part II and reduces the basis of your depreciable real property.⁶

Part II: Reducing Your Tax Attributes

Excluding canceled debt is not free. The tradeoff is reducing tax benefits you would otherwise carry forward. Part II is where this happens, and it causes more errors than any other section of the form.

The Default Ordering Rules

Unless you make the Line 5 election, federal law requires you to reduce attributes in this sequence, dollar for dollar except where noted:⁷

Line 6, net operating losses. Reduced dollar for dollar.
Line 7, general business credit carryovers. Reduced at 33⅓ cents for each dollar of excluded income.⁶
Line 8, minimum tax credits. Reduced at 33⅓ cents per dollar.
Line 9, capital loss carryovers. Reduced dollar for dollar.
Lines 10a and 10b, property basis. Reduced dollar for dollar. Line 10a covers nondepreciable personal property; Line 10b applies when you checked Line 1e for the mortgage exclusion.
Line 11, passive activity loss and credit carryovers. Reduced dollar for dollar.
Line 12, foreign tax credit carryovers. Reduced at 33⅓ cents per dollar.

Fill in only the lines for attributes you actually have. Most individuals with straightforward consumer debt end up reducing only the basis of property they own, and often skip the earlier lines entirely.

The Line 5 Election

Line 5 lets you skip the default sequence and reduce the basis of your depreciable property first. This can help if you have valuable NOL or capital loss carryovers you expect to use, and the basis reduction on depreciable property would have less immediate tax impact. Once made, the election is irrevocable.⁷

When Your Exclusion Exceeds Your Attributes

For bankruptcy and insolvency, if the amount on Line 2 exceeds all your combined tax attributes, the excess disappears. You owe nothing on it and account for nothing further. Qualified farm indebtedness works differently: any excess beyond your attributes and business property basis is included in income.⁶

Attaching the Form to Your Return

Form 982 attaches to your Form 1040 for the tax year the debt was canceled.⁸ If a lender forgave your debt in 2025, it goes with your 2025 return. Most tax software supports the form as an e-file attachment. For paper filers, include it in the packet mailed to your IRS processing center.

States handle canceled debt differently. Not every state follows the federal exclusion rules, and some require separate calculations. Check your state tax authority to see whether additional filings are needed.

Fixing a Past Return

If you already filed and paid tax on canceled debt that should have been excluded, file Form 1040-X with Form 982 attached. The general deadline is three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.⁹

Certain elections have a tighter window. The Line 5 election to reduce depreciable property basis first, and the Line 1d election for business real property, must be made on an amended return filed within six months of the original due date, not counting extensions. Write “Filed pursuant to Section 301.9100-2” on the amended return.¹⁰

Penalties and Recordkeeping

Errors on Form 982 carry real cost beyond the extra tax. The IRS imposes a 20% accuracy-related penalty on any underpayment caused by negligence or a substantial understatement of income tax.¹¹ If the IRS finds the errors were intentional, the civil fraud penalty rises to 75% of the underpayment attributable to fraud.¹² The insolvency calculation is the most audit-prone area, so document how you reached each fair market value figure.

Keep the completed Form 982, the insolvency worksheet, all supporting asset and liability documentation, and every 1099-C for at least three years from the filing date.¹³ Because Form 982 involves basis reductions that affect future tax years, hold on to everything related to the discharge for as long as you own the property whose basis was reduced. When you eventually sell it, the lower basis increases your taxable gain, and the IRS may want to trace the numbers back to the original filing.

1
Internal Revenue Service. About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness
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Internal Revenue Service. About Form 1099-C, Cancellation of Debt
3
Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments
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Internal Revenue Service. Instructions for Form 982 (12/2021)
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Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments – Section: Insolvency
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Internal Revenue Service. Instructions for Form 982 (Rev. December 2021)
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Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
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Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not
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Internal Revenue Service. File an Amended Return
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Internal Revenue Service. 21.6.6 Specific Claims and Other Issues
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Internal Revenue Service. Accuracy-Related Penalty
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Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
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Internal Revenue Service. How Long Should I Keep Records