How to handle 1099-C for individual debt when married

For canceled debts that predate marriage, it may be better to file separately for a year

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear Sally,
I am halfway through the three-year monitoring phase of the discharge process of a substantial student loan due to a permanent disability. I expect to receive a 1099-C form at the end of the waiting period, but I am unsure how to protect my husband from the tax consequences of this canceled debt.

We have been married for two years, and even though he was not around for the loans, from what I understand the amount of the debt will become taxable income when it is discharged in a year and a half.

If we file taxes as married filing separately, will this protect him as it would only appear as the taxable income for the canceled debt was from me (via the 1099-C because I have no job because of this disability)? Could I then file for insolvency with the IRS?

If this could affect our previous tax years, should we file as “married filing separately” until this is over? We filed jointly for the last two years. I’m thinking we should amend our taxes for the previous two years, just to be safe.

We have talked to a few tax people in our area, but no one knows what to do and can only give us educated guesses. We don't know who to contact for a straight answer. Can the IRS come after us for the entire three-year monitoring time perhaps, saying that the debt was also incurred by my husband somehow?

How we can protect him from my debt? I am sorry if I have not done well expressing my questions. – Ruth


Dear Ruth,
When you receive Form 1099-C, Cancellation of Debt, the canceled debt is included in the tax year to which the Form 1099-C applies, unless you qualify for an exception or exclusion. It does not affect other tax years.

The fact that you have filed jointly with your husband for the last two years has no effect on your income from canceled debt one way or another. Not only is there no good reason for you to amend your prior year tax returns from joint to separate, but you cannot do so. Once you file a joint return, you can’t choose to file separate returns for that year after the due date of the return, except in some cases when one spouse is deceased.

Don’t worry about filing separately for any other year, unless you have other reasons for doing so. Filing separately is seldom advantageous tax-wise, because you lose certain tax benefits.

Income from canceled debt on a Form 1099-C belongs to the person who was liable for the debt. (In the case of joint debt, it can be allocated by use of loan proceeds.) In this case, it’s clear that person was you. Your husband did not take out the loans, his name is not on them, and he did not use any loan proceeds. He would not be liable for the debt even if you live in a community property state, because you were not married when you took out the loans. The canceled debt on Form 1099-C is all yours.

When you receive Form 1099-C, you may want to start preparing your return by filing separately for that year. You can also calculate a joint filing first, to make sure which is advantageous for you.

When you file your separate return to report the income from canceled debt, you’ll fill out the insolvency worksheet to determine if you qualify for the insolvency exclusion. Following the IRS instructions, enter your own assets and your liabilities, including your student loan debt before the discharge, and all other debts. Do not include your husband’s assets or liabilities.

It’s very important to note that your insolvency for IRS purposes is determined as of the date the debt was canceled.

Attach Form 982 to your federal income tax return to show that you are using the insolvency exclusion. If you use tax software, the program will ask you questions, calculate your insolvency, and print the correct forms. Depending on your level of insolvency on the date the debt is discharged, part or all your canceled student loan debt may be excluded from your income.

You can stop worrying about your husband being liable for tax on your forgiven student loan debt. You probably won’t even have to worry about it yourself, assuming you meet the test for insolvency on the date the loans are forgiven. Being unable to work because of a disability is hard enough without having to worry about student loan debts or income from the forgiveness of student loan debt. I hope you are able to resolve your debt quickly, so you and your husband can move on to a better future together.

See related: 1099-C rule change is good for debtors, 1099-C frequently asked questions, 6 exceptions to paying tax on forgiven debt

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Updated: 01-18-2018