Insolvency Calculator: How Much Canceled Debt You Can Exclude
By Forrest Baumhover, CFP®, EA · Last verified November 11, 2026
Enter what you owed and what you owned immediately before the lender canceled the debt. The calculator measures your insolvency and caps the exclusion at that amount, as IRC 108(a)(3) requires.
This calculator adds up what you owed and what you owned just before a lender canceled a debt. If your debts were larger, the difference is the amount of your insolvency. The insolvency exclusion lets you leave canceled debt out of your income up to that amount, and no further. The calculator follows the Insolvency Worksheet in IRS Publication 4681 (2025).
How the Law Measures Insolvency
You are insolvent when your liabilities, meaning your debts, add up to more than the fair market value of your assets, meaning what each one is worth. The law measures both sides immediately before the cancellation. Your year-end balances and the values on the day you file do not count (IRC 108(d)(3)).
Count everything you own. Your assets include property that secures a debt. They also include exempt assets, which creditors cannot reach under the law, such as your interest in a pension plan and the value of your retirement account (Pub. 4681 (2025), Insolvency). Leaving out a 401(k) or an IRA because no creditor could take it is a mistake. It makes the insolvency figure too large.
The calculator subtracts your total assets from your total liabilities, as worksheet line 38 does. A result of zero or less means you were not insolvent. The exclusion can never exceed that difference, even when the lender canceled more (IRC 108(a)(3)).
Recourse and Nonrecourse Debt
Pub. 4681 calls a debt you owe personally a recourse debt. Every other debt is a nonrecourse debt: you owe it only through property you hold that secures it. The two kinds count differently.
A recourse debt counts in full. A nonrecourse debt counts up to the fair market value of the property that secures it. The part of a nonrecourse debt above that value counts only to the extent the lender forgave it (Pub. 4681 (2025), Insolvency).
For example, say you owe $200,000 on a nonrecourse loan, the property securing it is worth $150,000, and the lender forgives $30,000. That debt counts as $180,000: the $150,000 property value plus the $30,000 the lender forgave. Enter the full balance in the debts above, then describe the loan in the nonrecourse question. The calculator makes the change.
When the Insolvency Exclusion Does Not Apply
A bankruptcy case comes first. The law calls it a title 11 case, after the bankruptcy title of the U.S. Code. When you are under the court’s jurisdiction and the court grants the cancellation, or a plan the court approved cancels the debt, the bankruptcy exclusion applies and the insolvency exclusion does not (IRC 108(a)(2)(A), (d)(2)).
Qualified principal residence debt is a mortgage you took out to buy, build or substantially improve your main home, secured by that home. It also includes a refinance of that mortgage, up to the old balance just before the refinance (Pub. 4681 (2025); IRC 108(h)(2)). It has its own exclusion. For a cancellation before January 1, 2026, or one under a written arrangement made before that date, the home loan exclusion applies instead of the insolvency exclusion unless you elect the insolvency exclusion (IRC 108(a)(1)(E), (a)(2)(C)). A later cancellation without that kind of arrangement falls outside the home loan exclusion, so the calculator uses the insolvency rules. If only part of the loan counts as qualified principal residence debt, the home loan exclusion covers only part of the canceled amount, and the rest may qualify for another exclusion (Pub. 4681 (2025), Ordering rule).
The insolvency must be your own. Pub. 4681 says you do not qualify because a business or trust you own is insolvent, or because a partnership you belong to owns one that is insolvent. You must be insolvent yourself.
What the Exclusion Costs
Leaving canceled debt out of income has a price. The amount you exclude reduces your tax attributes, which Pub. 4681 describes as certain credits, losses and the basis of your assets. The statute’s list includes net operating losses, capital loss carryovers and the basis of your property (IRC 108(b)(1), (b)(2)). Basis, usually your cost, sets your gain or loss when you sell or lose the property (Pub. 4681 (2025)). A lower basis means a larger gain or a smaller loss. No tax attribute goes below zero (Pub. 4681 (2025), Reduction of Tax Attributes).
Any canceled amount above your insolvency stays in your income unless another exclusion covers it (Pub. 4681 (2025), Insolvency, Example 2).
What to Keep
The worksheet asks for each debt balance and each asset value immediately before the cancellation. Write down each figure with the cancellation date and the statement, appraisal or price listing it came from. You then have your numbers in one place if anyone asks how you reached them.
Common Questions
Does the insolvency exclusion make the canceled debt tax-free?
Yes, up to the amount of your insolvency. In exchange, the excluded amount reduces certain tax attributes, such as loss carryovers and the basis of your property (IRC 108(b)). The rest of the canceled debt stays taxable unless another exclusion applies (Pub. 4681 (2025)).
Do I count a retirement account that creditors cannot touch?
Yes. Pub. 4681 tells you to include exempt assets, such as your interest in a pension plan and the value of your retirement account. Leaving them out makes your insolvency look larger than it was.
Which date do I use for the values?
Use the moment just before the lender canceled the debt. The law measures your debts and assets at that point (IRC 108(d)(3)). A balance from a year-end statement fits only if nothing changed between that date and the cancellation.
I never got a Form 1099-C. Does the canceled debt still count?
Yes. Pub. 4681 says you report canceled debt as income even without a Form 1099-C, unless an exception or exclusion applies. Lenders the IRS calls applicable entities, such as banks, credit unions, federal agencies and businesses that lend money as a significant part of their trade, file Form 1099-C with the IRS.
I filed for bankruptcy. Does this calculator apply to me?
If the cancellation happened in your title 11 case, while you were under the court’s jurisdiction, with the court granting it or approving the plan behind it, the bankruptcy exclusion applies instead (IRC 108(a)(2)(A), (d)(2)). The calculator still shows your insolvency figure, but it applies no insolvency exclusion.
This page gives general information about IRS rules, not personalized tax advice. Reading it does not create a practitioner-client relationship. It gives an estimate from the numbers you enter, and you remain responsible for the figures on your return.
This tool asks for dollar amounts, a date and yes-or-no answers only. It never asks for a taxpayer identification number, name or address. The code on this page does not send your answers anywhere.
The Desk checked this tool against IRC 108 and the Insolvency section and worksheet of IRS Publication 4681 (2025) on November 11, 2026.
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