Question 1

Do I have to pay taxes on a 1099-C?

Accepted Answer

Generally yes -- cancelled debt is taxable income. However, major exclusions exist: you owe no taxes if you were insolvent (debts exceeded assets) at the time of cancellation, if the debt was discharged in bankruptcy, or if it was qualified principal residence debt. File IRS Form 982 to claim any exclusion.

Question 2

What is the insolvency exclusion for cancelled debt?

Accepted Answer

The insolvency exclusion lets you exclude cancelled debt from income if your total debts exceeded your total assets at the time of cancellation. You can exclude cancelled debt up to the amount you were insolvent. For example, if your debts exceeded assets by $20,000 and $15,000 was cancelled, the entire $15,000 is excluded.

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