How do I report income from a canceled debt (Form 1099-C) on my California income tax return?

In California, you generally report canceled debt income by first determining its taxability on your federal return; the taxable amount is then automatically included in the income you report on your state return. Here is how to report canceled debt on your California income tax return: Step 1: Review Your Federal Form 1099-C When a creditor cancels $600 or more of your debt, they must send you a Form 1099-C, "Cancellation of Debt." Carefully check that the information, especially the amount of canceled debt, is correct. If it is not, contact the creditor immediately to request a corrected form. Step 2: Determine if the Debt is Taxable Federally Not all canceled debt is taxable income. The IRS allows you to exclude canceled debt from your income if you were bankrupt or insolvent immediately before the cancellation, or if the debt was related to qualified farm debt or qualified real property business debt. A key exclusion is for qualified principal residence indebtedness. If you qualify for an exclusion, you must file IRS Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness," with your federal return. Step 3: Complete Your Federal Tax Return Report any taxable portion of the canceled debt as "Other income" on your federal Form 1040 (typically on Schedule 1). The amount you report here will factor into your Federal Adjusted Gross Income (AGI). Step 4: Transfer Your Federal AGI to Your California Return Your California tax return (Form 540) uses your Federal AGI as its starting point. Because the taxable canceled debt is already included in your Federal AGI, it is automatically carried over to your California return. For most people, no further steps are needed. Step 5: Make California-Specific Adjustments if Necessary California law conforms to most federal provisions regarding the exclusion of canceled debt income. If you properly excluded the income on your federal return (e.g., using Form 982 for insolvency or the principal residence exclusion), it is also excluded for California. In the rare case where California law differs, you would report the difference on Schedule CA (540), "California Adjustments." Important details and nuances: The most critical step is correctly handling the income on your federal return. If you do that, your California return will likely be correct as well. Keep copies of the Form 1099-C, your loan documents, and any forms you file (like Form 982) with your tax records. Warnings and limitations: Do not ignore a Form 1099-C. The California Franchise Tax Board (FTB) receives a copy from the IRS and will expect to see the income reported or excluded on your return. Calculating insolvency can be complex and requires a detailed worksheet of your assets and liabilities. This is general information and does not constitute legal advice. For complex situations, such as determining insolvency or if you have multiple canceled debts, you should consult with a qualified California tax attorney or CPA.