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What is Form 982? The insolvency exclusion, worked out

If a lender forgave part of what you owe, the IRS usually counts that as income. But if your debts were bigger than everything you owned just before the cancellation, you can leave some or all of it out, by filing Form 982. Here is how the numbers work.

Checked 2026-09-28 · All guides

General information from IRS pages and the tax code, checked 2026-09-28. Not tax advice: for your own return, use the free help at the bottom of this page.

Why a forgiven debt can be taxed

When a lender cancels, forgives or settles a debt for less than you owe, the IRS generally treats the forgiven amount as income for the year it was cancelled. Settle a $1,000 debt for $400, and you have $600 of cancelled debt.

Banks, credit unions, federal agencies and other lenders must send you a Form 1099-C (Cancellation of Debt) when they cancel $600 or more. The boxes that matter most:

Box 1, the date: your debts and belongings are measured on the day just before this date.
Box 2, the amount cancelled: may include interest and fees as well as the balance.
Box 3, interest: cancelled interest stays out of income only if paying it would have been deductible. Interest on a personal credit card isn't deductible (the tax code calls it "personal interest"), so cancelled card interest counts as income along with the rest of box 2. If box 2 shows $4,000 and box 3 shows $600 of that as interest, all $4,000 is cancelled debt. The insolvency exclusion below covers the interest part the same way as the rest.

No 1099-C doesn't mean no tax: the IRS says you must still report cancelled debt unless an exception or exclusion applies. If the form is wrong, the IRS says to contact the creditor. And if the creditor keeps trying to collect after sending it, the IRS notes the debt "may not have been canceled."

The main ways out, and what changed for 2026

Exceptions (the debt isn't taxable at all, with nothing else to do): a debt forgiven as a gift or inheritance, some work-based student-loan programs, and a few others.
Bankruptcy: debt cancelled in a bankruptcy case isn't income, and this comes before insolvency.
Student loans: the broad tax break covered only discharges from 2021 through 2025. It ended on December 31, 2025. From 2026, most student-loan forgiveness is taxable again unless another rule applies: work-based programs, the student's death or total and permanent disability (which needs a valid Social Security number on the return), or insolvency. That's the federal return; most states follow, with exceptions such as Maryland (see your state return).
Mortgage on your main home: this exclusion also ended. It can't be used for discharges after December 31, 2025, unless the arrangement was agreed in writing before January 1, 2026. We found no extension on IRS.gov or in the law as of 2026-09-27. Most states follow the federal result; Maryland keeps its own version (below).
Insolvency: the rest of this page.

What is the insolvency exclusion?

You were insolvent if your total debts were larger than the fair market value (what it would sell for) of everything you owned, immediately before the debt was cancelled. You can leave out of income the smaller of two numbers: the debt cancelled, or how far your debts were bigger than your assets. Anything above that stays taxable.

What counts as an asset

Everything you own, even things creditors can't touch: bank balances, your car, home or land, furniture and household goods, tools, jewelry, clothing, stocks, collectibles, retirement accounts (IRA, 401(k)), your interest in a pension, education accounts, the cash value of life insurance, and security deposits with a landlord or utility.

What counts as a debt

Credit cards (including the one being cancelled, at its balance just before), mortgages and home equity loans, car loans, medical bills, student loans, past-due mortgage interest, real estate taxes, utilities and childcare, income taxes still owed for earlier years, court judgments, and business or investment debts.

A worked example: $4,000 of credit card debt forgiven

A card company cancels $4,000 in 2026 and sends a 1099-C showing $4,000 in box 2. Just before the box 1 date, here's what the person owed and owned. (Made-up round numbers; the arithmetic follows the IRS's own example in Publication 4681.)

Debts just before the cancellation	Amount
Credit card (the balance being cancelled)	$4,000
Car loan	$5,000
Medical bills	$2,000
Total debts (worksheet line 15)	$11,000
What they owned (fair market value)	Amount
Bank account	$1,000
Car	$6,000
Household goods	$1,500
401(k): retirement accounts count	$500
Total assets (worksheet line 37)	$9,000
Result	Amount
Amount insolvent: $11,000 − $9,000 (line 38)	$2,000
Left out of income: smaller of $4,000 or $2,000 (Form 982, line 2)	$2,000
Still taxable: $4,000 − $2,000	$2,000

Change one number and the answer changes. With assets of $6,000, they'd be insolvent by $5,000, more than the $4,000 cancelled, so all $4,000 would be left out. With assets of $11,000 or more, they wouldn't be insolvent, and all $4,000 would be taxable unless another rule applied.

The worksheet is in Publication 4681 ("Insolvency Worksheet"). The IRS calls it optional and doesn't ask you to attach it; what you attach is Form 982. The tax code does require you to keep records that support your return, and the worksheet, with the balances and values behind it on the cancellation date, is that record. The Form 982 instructions say records must be kept as long as they may matter to the IRS.

How it's claimed on Form 982

Check the box on line 1b (insolvency).
Enter the amount you're leaving out on line 2 ($2,000 in the example).
Attach Form 982 to your federal income tax return for the year of the cancellation.
Report only the taxable part on Schedule 1 (Form 1040), on the cancellation-of-debt line (line 8c on the 2025 form).

Form 982 isn't a yearly form. The March 2018 revision is still the current one, with instructions revised in December 2021, and the IRS lists no recent changes. The Schedule 1 line number (8c) is from the 2025 form. The 2026 Schedule 1 was posted only as a draft (June 2026), and the 2026 Publication 4681 hadn't been published as of 2026-09-27; Schedule 1 line numbers sometimes move from one year to the next.

Form 982 and the "reduction of tax attributes"

Leaving debt out of income has a price, set out in Part II of Form 982: you reduce certain "tax attributes", such as losses or credits you'd carry forward, and the basis (roughly, what you paid) of things you own. For most people with only personal belongings, like a car and furniture, this is line 10a, and it's often smaller than the amount excluded.

Line 10a is the smallest of three amounts:

the basis of the personal things you still own at the start of the next year (home, car, furniture and so on);
the cancelled debt you're excluding (line 2);
right after the cancellation: the basis of everything you own plus your cash, minus everything you still owe. If that's zero or less, line 10a is $0.

The third amount is why many insolvent people reduce little or nothing: right after the cancellation, they still owe about as much as their things cost. The reduction is spread across your belongings in proportion to their basis.

The IRS's own example (Publication 4681, a car repossession)	Amount
Car-loan debt cancelled and all of it excluded (line 2)	$1,500
(a) Basis of belongings kept: furniture $5,000 + jewelry $500	$5,500
(b) Amount excluded	$1,500
(c) $5,500 belongings + $600 savings − $6,000 student loan still owed	$100
Line 10a: the smallest of the three	$100

The $100 is split by basis: furniture drops by $91 and jewelry by $9. What changes is the "cost" used if you later sell them at a gain; you don't pay anything now.

Common mistakes

Thinking no 1099-C means no tax.
Leaving retirement accounts or "protected" assets out of the total.
Excluding the whole debt when you were only partly insolvent.
Measuring at year end or at filing time instead of just before the cancellation (each cancellation gets its own date).
Counting the same asset or debt twice.
Forgetting to attach Form 982, or skipping the tax-attribute part.
Assuming the 2025 student-loan and mortgage rules still apply in 2026.
Reporting the full amount on a joint debt. Lenders must put the whole amount on each borrower's 1099-C when a joint debt is $10,000 or more, but each borrower reports only their own share. The IRS bases the share on the facts, mainly state law and who got and used the money. In its example, a cancelled $10,000 loan is split $7,500 and $2,500 because one borrower used 75% of the money, and each borrower checks insolvency separately.

Free help

Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE): free basic return preparation for people who generally make about $70,244 or less, people with disabilities, and limited-English speakers. Find a site at IRS.gov/VITA or call 800-906-9887. They can't claim the insolvency exclusion for you. The IRS's guide for volunteers (Publication 4012) lists insolvency on Form 982 as out of scope ("Determining insolvency is Out of Scope for the volunteer") and tells volunteers to refer these returns to a professional tax preparer or the Taxpayer Advocate Service. What volunteers can handle: a cancelled personal credit card debt when you were not insolvent (fully taxable), and the Form 982 lines for a cancelled mortgage on your main home (an exclusion that, as above, ended for most discharges after 2025).
Low Income Taxpayer Clinics: free or low-cost help with a dispute with the IRS, such as a notice about a 1099-C, usually where less than $50,000 is in dispute. They generally serve people whose income is at or below 250% of the federal poverty guidelines: in 2026, about $39,900 for one person, $54,100 for two, $68,300 for three and $82,500 for four (higher in Alaska and Hawaii). Each clinic applies its own rules within that. Find one through IRS Publication 4134 or 800-829-3676.
Taxpayer Advocate Service: an independent office inside the IRS for problems you can't resolve on your own. Free. Call toll-free 877-777-4778 (the number the IRS prints in Publication 4681 and the volunteer guide).

Your state return

Everything above is the federal rule. States set their own, and here is how they line up for 2026, from each state's own code or tax agency, checked 2026-09-28:

No state income tax. States with no tax on wages or ordinary income include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Washington. A cancelled debt there carries no state income tax. (New Hampshire's interest-and-dividends tax ended after 2024.)
Most income-tax states follow the insolvency exclusion. They start from your federal income, or adopt the federal cancelled-debt rule (26 U.S.C. § 108) by name, as Alabama, California and Hawaii do. So an amount Form 982 keeps off the federal return usually stays off the state return too. In the worked example above, the state would generally leave out the same $2,000 and tax the other $2,000.
Mississippi is the exception the other way. Its Department of Revenue says cancelled debt is Mississippi income unless it was discharged in bankruptcy (or under the 2020-2021 COVID laws), and its guidance names no insolvency exception.
New Jersey and Pennsylvania don't use the federal rules for this at all, and generally don't tax personal cancelled debt. New Jersey doesn't tax cancelled debt on the individual return. Pennsylvania taxes it only when it stands in for a taxable kind of income, such as a business debt or pay for services.

Student-loan forgiveness on the state return in 2026

The broad federal exclusion ended with 2025, and states that follow the federal code lose it too. A few exclude forgiveness under their own laws:

Maryland subtracts discharged student-loan debt, with no end date.
Massachusetts excludes discharged federal, state, school and private education loans (since 2022).
New York subtracts any student loan discharged or forgiven by the U.S. Secretary of Education under a federal program (since 2023).
Minnesota subtracts forgiveness that would have qualified under the 2021-2025 federal rule, including discharges after 2025.
New Jersey and Pennsylvania generally don't tax it (see above).
Partial rules: California excludes forgiveness under federal income-based repayment (IBR) only. Michigan excludes a disability discharge for 100%-disabled veterans, and Virginia a discharge because the student died. Illinois's own subtraction ended with 2025.

The code-date point. Some states follow the federal code only as it stood on a fixed date. The new permanent federal exclusion for a discharge after the student's death or total and permanent disability was enacted on July 4, 2025. States whose date is earlier don't pick it up automatically for 2026: California, Hawaii, Maine, Minnesota, North Carolina, South Carolina and Vermont (Minnesota's own subtraction likely covers these discharges anyway). Arizona, Idaho, Kentucky, Virginia and West Virginia use dates after July 4, 2025, so they do follow it. These dates are updated by state legislatures, often yearly.

Forgiven mortgage debt on the state return in 2026

States that follow the federal code lost the main-home exclusion along with it, except for a written arrangement made before January 1, 2026. Maryland keeps its own version: it subtracts what the federal exclusion would have allowed, ignoring the end date, for an owner-occupied main home, up to $100,000 ($200,000 for joint filers, heads of household and surviving spouses). New Jersey and Pennsylvania don't tax personal cancelled debt. California's own version covered only discharges before 2015. In most states, insolvency or bankruptcy is now the main way a forgiven mortgage stays out of state income.

State rules checked 2026-09-28; they change often, and each state's return instructions list its additions and subtractions for the year. General information, not tax advice.

Sources

Sources checked 2026-09-28.

General information, not tax advice. Rules and figures change; each figure shows where it comes from and when we checked it. Free help: IRS Volunteer Income Tax Assistance (VITA) and Low Income Taxpayer Clinics.