Will canceled debt affect my Social Security income?

To Her Credit with Sally Herigstad

Sally Herigstad is a certified public accountant and the author of “Help! I Can't Pay My Bills: Surviving a Financial Crisis.” She writes “To Her Credit,” a weekly reader Q&A column about issues involving women and credit, for CreditCards.com. She also has written for MSN Money and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

Ask Sally a question, or see if your question has already been answered in the To Her Credit answer archive.

I just received a 1099-C for canceled card debt. Will reporting that income on my tax return impact my Social Security benefits?

The Social Security Administration counts only wages from your job and net earnings if you are self-employed. It doesn’t count pensions, annuities or other retirement benefits. It also doesn’t count investment income, such as interest, dividends and capital gains or debt canceled in bankruptcy.

Dear To Her Credit,
I just found out a credit card company wrote off my debt. I know I have to report it as income and pay taxes.

If the canceled debt shows on my tax return as extra income, will that affect my Social Security benefit checks? I’m only allowed to make $16,000 per year with my Social Security checks, and if this debt write off shows up as income, it puts me over that amount. It’s not money I earned, obviously.

I'm retired at 63. I’m very upset about the possibility of having my Social Security benefits lowered. – Pam

Dear Pam,
When you’re living on a fixed income, the last thing you need is to owe an income tax bill and have your Social Security benefits lowered at the same time. Fortunately, that shouldn’t happen.

Your Social Security benefits are safe. Chances are, you won’t even owe tax on the canceled debt if you file your tax return correctly.

If you take Social Security benefits before your reach “full retirement age” as defined by the Social Security Administration, your benefits can be reduced if you earn more than a certain limit during the year. For 2018, that limit is $17,040.

However, the Social Security Administration doesn’t count all types of taxable and nontaxable income as “earnings.” In fact, you could have all kinds of income that doesn’t affect your Social Security benefits. The SSA counts only wages from your job and net earnings if you are self-employed. It doesn’t count pensions, annuities or other retirement benefits. It also doesn’t count investment income, such as interest, dividends and capital gains.

Your Social Security benefits are safe, but what about owing income tax on your canceled income?

Income from canceled debt is taxable – unless it meets one of the six canceled debt exceptions or exclusions set out by the Internal Revenue Service. For example, you don’t have to pay tax on debt canceled in a bankruptcy. You also don’t have to pay tax on canceled debt to the extent you were “insolvent” at the time the debt was canceled.

Many, if not most, people who have debts canceled are at least partially insolvent. Being insolvent means you had more debts than assets, which is of course why you had trouble paying your bills.

To show the IRS that you were insolvent, you must fill out a worksheet to show that your debts were greater than your assets.  Use the Insolvency Worksheet in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments to determine if you were fully or partially insolvent when the debts were canceled.


Tip: If you can show that you were insolvent at the time your debt was forgiven, you need to fill out IRS Form 4681 to avoid having to pay income tax on the canceled debt.

If you weren’t insolvent and don’t meet any other exceptions or exclusions, you generally must pay tax on the canceled debt. 

If the 1099-C you received has to be reported on your 2017 tax return, the standard deduction for a single person is $6,350 or $12,600 for married filing jointly.

If you just received your 1099-C for 2018,  under the new tax bill, you have a standard deduction of $12,000 if you file as single or $24,000 for married filing jointly. That means you won’t owe any federal income tax until your taxable income exceeds that amount. In addition, your Social Security benefits are not included in taxable income unless they, and your other income, exceed certain limits. Your canceled credit card debt would have to be quite substantial before you would actually owe any tax.

Depending on your state income tax laws, you may also owe state income tax on the canceled debt. As with federal tax, it should be minimal unless the amount of canceled debt is very large and you didn’t qualify for any exclusions or exceptions. Be sure to seek qualified professional tax advice if you are afraid you owe a substantial amount and you aren’t sure how to proceed.

See related: 1099-C frequently asked questions

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Updated: 03-22-2019