Cancellation of Debt Tax Calculator (1099-C)

Not always. Canceled debt is ordinary income under general tax principles — you received the borrowed funds tax-free, so forgiveness of the obligation to repay is income. But IRC §108 provides several exclusions. The most common is insolvency (§108(a)(1)(B)): if your total liabilities exceeded the fair market value of your total assets immediately before the cancellation, you can exclude canceled debt up to the amount you were insolvent by. Other §108 exclusions cover bankruptcy discharge and qualified farm or real property business debt. The qualified principal residence indebtedness exclusion (§108(a)(1)(E)) doesn't apply to discharges completed after December 31, 2025 — see IRS Pub 4681 — so mortgage debt canceled from 2026 onward needs the insolvency or bankruptcy exclusion instead unless Congress renews it.

List every liability (credit cards, mortgages, car loans, medical bills, the debt being canceled itself, unpaid taxes, etc.) and every asset at fair market value (cash, bank accounts, real estate, retirement accounts, vehicles, personal property) as of the moment right before the cancellation. Insolvency amount = total liabilities minus total assets FMV, floored at zero. If that figure equals or exceeds the canceled debt, the entire amount is excludable; if it's less, only that portion is excludable and the remainder is taxable.

Yes. To exclude canceled debt from income under §108, you must file Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) with your return, checking the box for the insolvency exclusion and entering the excluded amount. Excluding COD income under §108 also requires reducing certain tax attributes (net operating losses, credit carryovers, basis in property) by the excluded amount — this calculator estimates the exclusion, not the attribute reduction, which is return-specific.

Debt discharged in a Title 11 bankruptcy case is excluded from income entirely under §108(a)(1)(A), regardless of solvency — you don't need to run the insolvency worksheet at all. Check "Discharge of indebtedness in a title 11 case" on Form 982 instead of the insolvency box. If you were both in bankruptcy and insolvent for the same debt, the bankruptcy exclusion applies first.

The insolvency exclusion mechanics are the same, but foreclosures and repossessions often also trigger a separate gain-or-loss calculation on the disposition of the property (Form 8949/Schedule D) in addition to any COD income on the unpaid loan balance above the property's FMV. Pub 4681 walks through both a recourse-debt example (COD income = forgiven amount over the debt) and a nonrecourse-debt example (no separate COD income — the full canceled amount is treated as sale proceeds). This calculator handles the COD income side only.

Similar tax mechanics, different form and different exclusions. The American Rescue Plan Act's broad federal exclusion for student loan discharges only covered discharges from 2021 through 2025 (many states taxed it anyway) — OBBBA §70119 replaced that temporary rule for discharges after December 31, 2025 with a narrower, permanent exclusion limited to loans discharged on account of death or total and permanent disability. So general IDR forgiveness discharged in 2026 or later is taxable again federally unless another §108 exclusion (insolvency, bankruptcy) applies, while death/TPD discharges remain permanently excluded. Use the /student-loan-forgiveness-tax-calculator/ for that scenario — this calculator is built around the general 1099-C insolvency worksheet under §108(a)(1)(B).