Form 982 is the IRS form you attach to your return to exclude canceled debt from your income, and to reduce your tax attributes by the amount you excluded. You can use it when the debt was canceled in a bankruptcy case, while you were insolvent, or when it was qualified farm, qualified real property business or qualified principal residence debt. Without it, a canceled debt shown on Form 1099-C is normally taxable.
That's the trade the form makes: you don't pay tax on the forgiven amount now, but you give up things like loss carryovers or basis that would have saved tax later. Everything below comes from Form 982 (Rev. March 2018, the current revision) and IRS Publication 4681 for 2025 returns, checked in October 2026.
The five reasons you can check in Part I
| Line | Reason the debt is excluded | Key condition |
|---|---|---|
| 1a | Discharge in a title 11 bankruptcy case | Lines 1b to 1e don't apply to a bankruptcy discharge |
| 1b | Discharge while insolvent | Only up to the amount you were insolvent immediately before the cancellation |
| 1c | Qualified farm indebtedness | Farming-specific rules in Pub. 4681 |
| 1d | Qualified real property business indebtedness | Debt tied to business real estate |
| 1e | Qualified principal residence indebtedness | For discharges before January 1, 2026; limit $750,000, or $375,000 married filing separately |
Line 2 is the total you're excluding. Part II is where you reduce your tax attributes, such as a net operating loss, general business credit carryovers, capital loss carryovers and the basis of your property, in the order the form sets out.
The insolvency exclusion, step by step
Insolvency is the line most people use after a credit card or personal loan is forgiven. You were insolvent to the extent your total liabilities were more than the fair market value of all your assets immediately before the cancellation.
- List every liability you had immediately before the cancellation, including the debt being canceled.
- List the fair market value of every asset you owned at that moment, including retirement accounts.
- Subtract assets from liabilities. That's the amount you were insolvent.
- Your exclusion is the smaller of the canceled debt or the amount you were insolvent.
- Check line 1b, enter that exclusion on line 2, and complete Part II.
- Report any canceled debt above the exclusion as income, unless another exclusion applies.
Pub. 4681 has an Insolvency Worksheet that walks through the asset and liability lists. One rule worth knowing: you can't use the insolvency exclusion because a grantor trust or disregarded entity you own is insolvent. You have to be insolvent yourself.
Two IRS examples that show how it works
| Example 1 | Example 2 | |
|---|---|---|
| Credit card debt canceled in 2025 | $5,000 | $5,000 |
| Total liabilities just before | $15,000 | $10,000 |
| Fair market value of assets | $7,000 | $7,000 |
| Amount insolvent | $8,000 | $3,000 |
| Excluded on Form 982 | $5,000 | $3,000 |
| Still taxable | $0 | $2,000 on Schedule 1, line 8c |
Those figures come straight from Pub. 4681, as of October 2026. The second example is the one people don't expect: being a little insolvent only shelters a little of the debt.
The main home exclusion is ending
Qualified principal residence indebtedness is debt you took on to buy, build or substantially improve your main home. Pub. 4681 says it can be excluded for discharges before January 1, 2026, up to $750,000 ($375,000 if married filing separately). It doesn't cover a cancellation for services you performed for the lender, or one that isn't tied to a fall in your home's value or your finances.
Pub. 4681 also says other exclusions are applied before insolvency, and insolvency doesn't apply to qualified principal residence debt unless you elect it instead. For a home debt canceled in 2026 or later, insolvency or bankruptcy may be the only routes left.
Exceptions that mean you may not need Form 982 at all
Pub. 4681 separates exclusions, which need Form 982, from exceptions, where the canceled amount simply isn't income in the first place. The exceptions it lists include amounts canceled as a gift, certain student loans, a price reduced after purchase, and a debt whose payment would have been deductible.
Student loans are the one to read closely. Pub. 4681 lists exclusions for cancellation tied to meeting certain work requirements, student loan repayment assistance programs, cancellation due to death or total and permanent disability, and cancellation of certain other loans after December 31, 2020 and before January 1, 2026. That last window has now closed, so a 2026 cancellation needs to fit one of the other rules.
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Where Form 982 fits
You'll usually start with a Form 1099-C from the lender showing the canceled amount in box 2. If you've already filed and missed an exclusion you qualified for, you can claim it by amending with Form 1040-X and attaching Form 982.
The verdict
If a lender canceled debt and you were in financial trouble at the time, don't just report the 1099-C as income. Do the insolvency worksheet first: if your debts were more than your assets, Form 982 can take some or all of it off your tax bill. Just remember it's a deferral, not a gift, because Part II reduces the tax benefits you'd otherwise carry forward.
Frequently asked questions
What is Form 982 used for?
To exclude canceled debt from income under one of the exclusions, such as bankruptcy or insolvency, and to reduce your tax attributes by the amount excluded.
Do I need Form 982 if I received a 1099-C?
Only if you're claiming an exclusion. If no exclusion or exception applies, the canceled debt is reported as income.
How do I know if I was insolvent?
You were insolvent to the extent your total liabilities were more than the fair market value of your total assets immediately before the debt was canceled.
Can I still exclude canceled mortgage debt on my main home?
Pub. 4681 says qualified principal residence indebtedness can be excluded for discharges before January 1, 2026, up to $750,000, or $375,000 if married filing separately.
What does reducing tax attributes mean?
You lower items such as net operating losses, credit carryovers, capital loss carryovers and property basis in Part II, so the excluded debt costs you future tax benefits instead.
Where does taxable canceled debt go on the return?
In the IRS insolvency example, the taxable part is included on Schedule 1 (Form 1040), line 8c.
