When You Need Form 982
File Form 982 when you're excluding cancelled debt from income under any of these provisions: bankruptcy discharge (Box 1a), insolvency (Box 1b), qualified farm indebtedness (Box 1c), qualified real property business indebtedness (Box 1d), or qualified principal residence indebtedness (Box 1e). Most consumers use 1a (bankruptcy) or 1b (insolvency).
Form 982 must be filed with the tax return for the year the debt was cancelled. If you've already filed without Form 982, file an amended return (Form 1040-X) with Form 982 attached.
Completing the Form
Part I -- General Information: Check the applicable box (1a for bankruptcy, 1b for insolvency). Line 2: Enter the total amount of discharged debt excluded from income. For insolvency, this is the lesser of: the cancelled debt amount or your insolvency amount. For bankruptcy, this is the full cancelled amount.
Part II -- Reduction of Tax Attributes: This is required. When you exclude cancelled debt, you must reduce certain tax attributes (net operating losses, credit carryovers, and ultimately, the basis of your property). Line 10a is the most commonly used -- reduction of basis in depreciable/non-depreciable property. Most individual filers can reduce the basis of their assets by the excluded amount.
Common Filing Mistakes
1. Not filing Form 982 at all -- many people receive 1099-Cs and either ignore them or pay the tax without knowing about exclusions. 2. Incorrect insolvency calculation -- forgetting to include all debts or all assets. 3. Wrong tax year -- the exclusion must be claimed for the year shown on the 1099-C. 4. Not reducing tax attributes -- Part II of Form 982 is mandatory. 5. Not keeping documentation -- the insolvency worksheet should be kept with your tax records in case of audit.
Consider using a tax professional if you received a large 1099-C or if your situation is complex (multiple cancellations, partial insolvency, bankruptcy). The cost of professional preparation is usually worth it to avoid errors that could trigger an audit.
Frequently Asked Questions
Do I need to file Form 982 for bankruptcy discharge?
Yes. Even though bankruptcy discharge is automatically excluded from income, you should file Form 982 (checking Box 1a) to document the exclusion and reduce your tax attributes per Part II. Some filers skip this and are later contacted by the IRS.
Can I file Form 982 for past years?
Yes. File an amended return (Form 1040-X) for the applicable year with Form 982 attached. There's generally a 3-year window for claiming refunds, but you can file Form 982 with an amendment at any time to correct an error.
What if my tax preparer didn't know about Form 982?
Unfortunately common. Many tax preparers are unfamiliar with cancelled debt exclusions. If you paid tax on cancelled debt that should have been excluded, file an amended return. You can claim a refund for overpaid taxes within 3 years of the original filing date.
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