Tax Tip of the Week: 4 Reasons a Discharged Debt Reported on Form 1099-C May Not Be Taxable

Home » Blog » Tax Tip of the Week: 4 Reasons a Discharged Debt Reported on Form 1099-C May Not Be Taxable


In today’s bad economy I often see taxpayers who have received a form 1099-C for forgiveness of debt.  Most taxpayers have been trained by the IRS to believe that if they received a 1099 of any type, they have taxable income.

But there are four areas where the forgiveness of debt may not be taxable.  The first three are firmly outlined in current law as follows:

  1. If you filed bankruptcy, the debt discharge is most likely not taxable.
  2. If you were “insolvent” at the time the debt was discharged, then the forgiveness of debt is non-taxable.  Insolvency simply means the total of your debt is higher than the total of your assets.
  3. If the 1099-C is related to the forgiveness of debt on your principal residence, it is most likely non-taxable.

The fourth time a 1099-C may be non-taxable is if was issued in error.  A recent tax court decision (Stewart, TC Summ. OP, 2012-46) illustrates this point.  In this case a man failed to pay off some credit cards more than ten years earlier.  The debt was sold to a new company and they attempted to collect even though his state’s debt collection law stated the time for collection the debt had passed.  He protested it and the company stopped collection efforts.  But they issued a 1099-C in the current year for discharged debt.  

The IRS said that meant he owed taxes on the amount listed on the 1099-C. The tax court disagreed, stating that the debt was discharged years ago and should not have been issued.

Bottom line:  If you receive a 1099-C, be sure to consult with a qualified, experienced tax preparer.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation.