Where to Report 1099-C Canceled Debt on Your Taxes

Canceled debt from a Form 1099-C is reported on Schedule 1 (Form 1040), Line 8c, and any portion you can legally exclude is claimed on Form 982 filed with the same return.¹² That’s where the 1099-C amount, or whatever portion of it survives the exclusions, becomes part of your taxable income. Everything else about a canceled debt return is figuring out how much of the Box 2 number actually reaches Line 8c.

Line 8c on Schedule 1

The 2025 Schedule 1, used for returns filed in 2026, has a dedicated Line 8c labeled for cancellation-of-debt income. Enter the taxable amount there. From Line 8c, the number is pulled into Line 9 (total other income), then combined with Lines 1 through 7 to produce Line 10, your total additional income. Line 10 transfers to Line 8 on Form 1040 itself, folding into your adjusted gross income.¹ That raises your AGI, which in turn can affect your bracket and credit eligibility.

You have to report the canceled debt even if the lender never sent you a 1099-C. The obligation to include forgiven debt in income does not depend on receiving the form.³

Figuring the Amount That Goes on Line 8c

Start with Box 2 of the 1099-C, the amount of debt discharged. Check Box 3 to see whether the lender rolled unpaid interest into Box 2. If interest is included and it wouldn’t have been deductible had you paid it (as is typical for personal debt), you may need to back that portion out of what you report; the breakdown in Box 3 is there so you can see it.⁴

Then subtract anything you can exclude under Internal Revenue Code Section 108. The exclusions cover discharge in a Title 11 bankruptcy case, insolvency, qualified farm indebtedness, qualified real property business indebtedness, and qualified principal residence indebtedness.⁵ The principal residence exclusion expired for discharges after December 31, 2025, so it is not available for home mortgage debt forgiven in 2026 or later.⁶ Debt forgiven as a gift, and certain student loan forgiveness like Public Service Loan Forgiveness, sit outside Section 108 but also stay off the return.³ The broader federal exemption for student loan forgiveness under the American Rescue Plan Act expired January 1, 2026, so loans forgiven through income-driven repayment plans in 2026 and beyond are generally taxable at the federal level.⁷

Whatever survives all of that goes on Line 8c. If nothing survives, Line 8c can be zero, but you still need to file Form 982 to explain why.

Filing Form 982 for the Excluded Portion

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is how you tell the IRS that some or all of the Box 2 figure is excluded from income.² Without it, the IRS matching system sees the 1099-C the lender filed and treats the missing income as unreported, regardless of whether you actually qualified for an exclusion.

Part I is where you identify the reason. Check the box on Line 1 that matches your exclusion:

Line 1a — discharge in a Title 11 bankruptcy case
Line 1b — discharge to the extent of insolvency (not in a Title 11 case)
Line 1c — discharge of qualified farm indebtedness
Line 1d — discharge of qualified real property business indebtedness
Line 1e — discharge of qualified principal residence indebtedness (not available for 2026 discharges)

On Line 2, enter the dollar amount you are excluding. For a bankruptcy discharge that can be the full amount from Box 2. For insolvency, it is capped at how insolvent you were immediately before the cancellation.²

If you file electronically, tax software usually prompts for Form 982 the moment you enter a 1099-C and indicate an exclusion. On a paper return, place Form 982 behind Form 1040 and its supporting schedules.

The exclusions have a priority order. Bankruptcy overrides everything else. Insolvency takes precedence over the farm and real property exclusions. If you qualify under more than one, the higher-priority exclusion applies first.⁵

The Insolvency Calculation Behind Line 1b

Insolvency is the exclusion most individual filers rely on outside of bankruptcy. To claim it, you have to show that your total liabilities exceeded the fair market value of your total assets at the moment immediately before the debt was canceled, not on the date you file.⁸

Publication 4681 includes a worksheet for the calculation. On the asset side, list the fair market value of what you owned at that moment:

Real estate, including your primary home, investment property, and land
Cars and other vehicles
Cash, bank account balances, and investments
Jewelry and personal property
Retirement accounts, including IRAs and 401(k)s⁹

On the liability side, list everything you owed at that same moment, including the debt about to be forgiven: mortgages, credit cards, student loans, medical bills, car loans, everything. Subtract assets from liabilities. A positive result is your insolvency amount.⁸

That number caps the exclusion. If you were insolvent by $10,000 and the lender forgave $15,000, you exclude $10,000 on Form 982 and report the remaining $5,000 on Schedule 1, Line 8c. If your insolvency amount matches or exceeds the discharged balance, nothing goes on Line 8c. Keep the completed worksheet and the records behind it; the IRS can ask for them.

Reducing Tax Attributes in Part II

An exclusion is not entirely free. In exchange, you reduce certain tax benefits by the excluded amount and report the reductions in Part II of Form 982.² Unless you elect otherwise, the reductions run in this order:

Net operating losses, dollar for dollar
General business credit carryovers, at 33⅓ cents per dollar of excluded debt
Minimum tax credits, at 33⅓ cents per dollar
Net capital losses and capital loss carryovers, dollar for dollar
Property basis, dollar for dollar, but not below zero for any individual asset
Passive activity loss and credit carryovers (losses dollar for dollar, credits at 33⅓ cents per dollar)
Foreign tax credit carryovers, at 33⅓ cents per dollar

For most individual filers, the practical effect is a lower basis in property they own, which produces a larger taxable gain if they later sell. Line 5 lets you elect to reduce the basis of depreciable property first, before touching other attributes, if that outcome is better for your situation.

Skipping the Report

The lender files the 1099-C directly with the IRS, so the agency’s automated matching system will flag a return that leaves the income off. The accuracy-related penalty for an understatement is 20% of the underpaid tax, on top of the tax owed.¹⁰ Interest runs on both the unpaid tax and the penalty. As of early 2026, the underpayment interest rate for individuals is 7%, compounded daily.¹¹

The point worth repeating: even if you believe none of the canceled debt is taxable, silence looks identical to omission to the matching system. Claim the exclusion on Form 982 and put the answer on the return.

State Returns

Most states with an income tax start from federal adjusted gross income, so canceled debt taxable at the federal level flows to the state return automatically. Some states, however, have not conformed to every federal exclusion, and can tax amounts the federal government excludes or the reverse. Check your state’s income tax instructions before filing to see how it treats cancellation-of-debt income for the year you are reporting.

1
Internal Revenue Service. 2025 Schedule 1 (Form 1040) – Section: Part I Additional Income
2
Internal Revenue Service. Instructions for Form 982 (Rev. December 2021) – Reduction of Tax Attributes Due to Discharge of Indebtedness
3
Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
4
Internal Revenue Service. Instructions for Forms 1099-A and 1099-C (Rev. April 2025)
5
Office of the Law Revision Counsel. 26 USC 108 – Income from Discharge of Indebtedness
6
Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments
7
Federal Student Aid. How Will a Student Loan Payment Count Adjustment Affect My Taxes
8
Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments – Section: Insolvency
9
Internal Revenue Service. Insolvency Determination Worksheet
10
Internal Revenue Service. Accuracy-Related Penalty
11
Internal Revenue Service. Quarterly Interest Rates