What does a Form 1099-C for an old cancelled debt mean for my 2025 tax return?

So I just got this letter in the mail with a Form 1099-C for a credit card debt from like 14 years ago that I completely forgot about. Apparently the debt was around $2,700 and the bank finally "discharged" it (whatever that means legally). The letter says this discharged debt is considered taxable income and I need to report it under "other income" on my 2025 tax return. I'm totally confused about this because I thought old debts just disappeared?? I only worked for about 4 months last year because of some health issues, and I was expecting a small refund. Now I'm worried this 1099-C is going to not only wipe out my refund but actually make me owe money to the IRS? Am I understanding this right? I'm using one of those online tax preparation services but have no idea how to handle this form. Has anyone dealt with a Form 1099-C before? What should I expect here?

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18 comments

Nathaniel Stewart

•8M

When a lender cancels or forgives a debt, the IRS considers that money as income to you since you received the benefit of that money without having to pay it back. That's why you received the Form 1099-C. Yes, you'll need to report this as "other income" on your tax return. However, there are some exceptions that might help you. If you were insolvent when the debt was forgiven (meaning your total debts exceeded your total assets), you might qualify for the insolvency exclusion using Form 982. Many people don't realize this can reduce or eliminate the tax impact. Also, the timing of when the debt was actually discharged matters - not when you originally borrowed the money. The 1099-C indicates the creditor has finally given up on collecting, which is why it's affecting your 2025 taxes even though the debt was from years ago.

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Nathaniel Stewart

•8M

The insolvency exclusion means if your total liabilities (all debts) exceeded your total assets right before the cancellation, you can exclude some or all of the cancelled debt from your income. You'd need to complete Form 982 and attach it to your tax return. You would need to create a record of what your assets and debts were at the time the debt was cancelled (the date shown on your 1099-C). This includes bank accounts, investments, cars, house, and all other debts. It doesn't matter when you originally took out the debt - what matters is your financial situation when the cancellation happened.

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Santiago Diaz

•8M

After going through a similar situation with a bunch of old credit card debt, I discovered taxr.ai (https://taxr.ai) and it honestly saved me so much stress. I uploaded my 1099-C and some basic info about my financial situation when the debt was cancelled, and it figured out I qualified for the insolvency exclusion that the previous commenter mentioned. The tool walks you through exactly what forms you need and how to fill them out. For 1099-C situations specifically, it helps determine if you qualify for any exclusions and calculates everything automatically. It even helped me figure out the Form 982 which is super confusing on its own.

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Santiago Diaz

•8M

They have a guided tool that helps you estimate your assets and liabilities at the time of cancellation. You don't need exact values - reasonable estimates are acceptable to the IRS. It asks about common assets like vehicles, bank accounts, and property values that can be researched based on when the cancellation happened. The service is pretty solid for documentation. It saves all your inputs and calculations, plus gives you a complete audit trail with detailed worksheets showing how they reached the final numbers. Everything is exportable as a PDF that you can keep with your tax records in case the IRS ever has questions.

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Millie Long

•8M

I wanted to follow up about my experience with that taxr.ai site. I was initially skeptical but decided to try it since my situation with a 1099-C from an old debt was stressing me out. The guided tool really did help me estimate my assets and liabilities from when my debt was cancelled. Turns out I qualified for partial insolvency! It saved me around $400 in taxes I would have paid otherwise. The documentation it generated made it super easy to fill out Form 982 correctly. My return was accepted by the IRS without any issues. Just wanted to share in case anyone else is dealing with this 1099-C headache.

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Debra Bai

•8M

If you're having trouble understanding your 1099-C situation, you might want to talk directly with an IRS agent. I wasted weeks trying to figure out if I qualified for the insolvency exclusion on my own until I found Claimyr (https://claimyr.com). I was initially hesitant, but their service got me connected to an actual IRS representative in about 15 minutes when I'd been trying for days on my own. The IRS agent walked me through exactly how to handle my 1099-C and what documentation I needed for the insolvency worksheet. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone system for you and call you back when they reach a human.

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Debra Bai

•8M

It's not magic - they use a combination of automated dialers and knowledge of the IRS phone system to navigate the complex phone tree and hold times. When they reach an agent, they connect you directly - they don't collect any of your tax info or intervene in the conversation. I understand the skepticism, and you're right that IRS agents sometimes give different answers. That's actually why I made sure to take detailed notes during my call and asked the agent to note our conversation in my file. If you're concerned about conflicting info, you can always ask the agent to reference the specific IRS publication they're basing their answer on.

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Laura Lopez

•8M

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I was still desperate for answers about my 1099-C situation, so I reluctantly gave it a try. Within 20 minutes I was talking to an actual IRS agent who explained exactly how to handle my cancelled debt. Turns out I qualified for the insolvency exclusion, but I would have filled out Form 982 completely wrong without their guidance. The agent even emailed me the specific worksheets I needed. Saved me a ton in taxes and potential penalties. Sometimes it's worth admitting when you're wrong!

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Victoria Brown

•8M

Just so you know, if that $2,700 debt is your only income issue, you might still get a refund depending on your other tax situations. The cancelled debt gets added to your income, but if you had taxes withheld from your paychecks during those 4 months of work, that withholding might still cover your total tax liability. Also, if you have kids or qualify for earned income credit, those credits might offset the additional tax from the 1099-C. Don't panic until you actually run the numbers through your tax software.

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Victoria Brown

•8M

Cancelled debt income reported on a 1099-C does count toward your AGI, which can affect the amount of earned income credit you receive. However, it's not considered "earned income" for purposes of calculating the EIC itself. The higher AGI might reduce your EIC amount, but you'll still qualify if you meet the other requirements. The best approach is to enter all your information including the 1099-C into your tax software and see what happens. Many people are surprised that the impact isn't as bad as they feared once all credits and deductions are calculated.

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