Tuesday, October 1, 2013

Cancelled Debt and Insolvency

If you like the blog, buy my book: Everyday Taxes 2016 both the kindle and print versions have detailed information on this topic, and links to an excel spreadsheet version of the INSOLVENCY WORKSHEET.  This is available only to book buyers.  The book is a must for everyone, regardless of how they do their taxes.

So you got a 1099C, or were informed by someone you owe money to that they're cancelling some of your debt.  Maybe you were foreclosed on, had your car repossessed, or negotiated a settlement to pay a credit card less than what you owe.  If you haven't gotten a 1099C yet, you will.  Now is the time to get prepared.  I wrote an earlier post on cancellation of debt in general, which you should read before continuing: http://www.supertaxgenius.blogspot.com/2012/03/i-got-1099c-now-what.html

I'll wait...take your time...

Okay, so now let's talk about how to find out if you're insolvent.  First look at the 1099C, box 1 and note the date.  If you don't have the 1099C, use the date the debt was forgiven (you can call the lender to figure this out.)  You will use this date and figure out, as of that date, how much your assets were, and how much your liabilities were.  Your assets are everything you own, your liabilities are everything you owe.

We'll start with liabilities first.  Start with the debt that was cancelled, the debt they cancelled counts as a liability, so that's your first number.  Go to your credit cards, mortgages, car loans and any other money that you owe.  Print out the first statement after the date in question.  Now review the statement and determine what you owed as of our date.  You can do this by highlighting the beginning balance and any charges or payments up to our date.  Add the balance and charges, subtract any payments, and write this number on the statement.  Repeat for all of your debts, and then add them up to get a total amount of liabilities.  SAVE each of the statements!  The IRS can ask you to prove how insolvent you were.

Now assets.  Start with your bank accounts, brokerage statements, investments etc.  Print out each statement and highlight the value on the date in question.  For checking accounts, they usually keep a running total.  For brokerages, they may only give you a monthly balance.  If you can, go online and get the actual balance on our date.  Print the screen with this balance and keep it with the statement for that account.  If you can't get an exact amount, use the balance closest to our date.  Make sure to do this for your retirement plan at work (401K, 403B, TSP, etc.), as well as any Individual Retirement Accounts.

Now it gets harder.  For any vehicles you have, go to kbb.com or edmunds.com and determine the value of them.  You can use some judgement to get the best value (lower is better) but be reasonable.  If your car is truly a piece of s**t and you are using that to drop the value, take pictures to justify this assesment.  It's also not a bad idea to take a picture of the odometer reading.  Print the value you choose and highlight the value and attach it to any pictures you took.

Now you have to value everything else you own.  This is difficult.  Big, valuable items, take pictures and try to get a value off the internet - print any pages with values you use.  For your general household, pictures and video can be useful to prove you don't have fancy, expensive furniture.  Talk to a few people who know about values and try to get a good estimate.  I wouldn't do an appraisal unless you're really unsure, just make sure your values aren't ridiculous.

For your house (or houses) get a real estate agent to run comps and give you a written value estimate for them.  Save this paperwork.

Now the kicker.  If you are receiving a pension such as military retirement, state or federal retirement, union retirement, VA disability or social security (even if it is not taxable) you must figure out the value of your payments as a lump sum based on your life expectancy.  This is hard to figure out, and the number is usually an insolvency killer.  (I did several checks of my military retirement from various sources and found values between $800,000 and $1.7 million.)  If you're close with everything else, this will probably prevent you being insolvent and is probably not worth the effort.

Now take all your liabilities and add them up.  Do the same with your assets.  Subtract assets from liabilities and if you get a positive number, you're insolvent!  This generally means you can avoid paying taxes on your cancelled debt up to the amount of your insolvency.

A couple words of warning:

1)  Save all the paperwork.
2)  Make sure to include the value of anything they repossesed in the asset column.
3)  If the debt cancelled was in your name (or your spouses) and not in the other's name, you have to calculate insolvency for the individual, not both of you (in this case include the full amount of anything in only the debtor's name, and split everything in both of your names.)
4)  If the numbers are close, make sure you have your ducks in a row.  If you lowballed the value of your household, or forgot to include your $3000 engagement ring, things can get ugly, and you could owe money back.  Conversely, if your liabilities are enormous, and you have tens of thousands of dollars of insolvency above your cancelled debt, you can probably relax and not be quite as anal about household contents values (still do all the cars, house, big toys and bank accounts just like we said.)
5)  Insolvency affects tax attributes for future tax years.  This is way beyond the scope of a blog post, but you should seek professional assistance to determine the effect, especially if you have a business, investments, or rental property.

Don't forget the BOOK with the excel spreadsheet link!

Good Luck!

197 comments:

  1. Thank you for your blog post! This has answered quite a few of the questions I had about my insolvency. I knew I was insolvent when I completed the form 4681 (with all of my proof!), but I did not know I could add the cancelled debt to my liabilities (that makes a huge difference).

    I checked line 1b and entered the total amount from all of the 1099Cs I received on line 2, but what do I put for line 3, Part II and Part III, if anything? The bulk of my insolvency is from student loan debt (aside from the cancelled student loan debt), but I do own my home, so the word "property" caught my attention in the other sections of form 982.

    Thank you for explaining this stuff!

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  2. You need to include ALL your assets in Section II. All your furniture, cars bank accounts etc. You can include any debt associated with them in section I. Use KBB.com to look up the value of your cars and put that in section 2, and put what you owe on them in section 1. The worksheet is an analysis of your entire world of assets and liabilities, not just what was cancelled.

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    1. ok on your house... my house was in foreclosure when the other debt was cancelled... it was a line of equity but it was NOT used for work on the home.... anyway.... does my house count as an asset and a liability? The mortgage is listed as a liability.... there is no equity and I am in the hole on the house.. does it still count as an asset under assets?

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  3. I appreciate your info. I think I've managed to figure out the insolvency worksheet with one exception: the discharged debt is only in Mom's name. Do I include Dad's 401k balance or other retirement info in assets? They filed MFJ in Kansas, a common law state.
    THANKS!

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  4. You should figure your Mom's insolvency only. Include half of any jointly held assets or liabilities. Do not include father's 401K

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    1. What would be the effect if all assets are in the husband's name and the discharged debt is only in wife's name? Example: bank accounts, house, car, etc all in husband's name only.

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  5. Thanks for your help. One more question--can I file the 982 form without having to file an amended 1040? Do I need to file the 982 at all if she her insolvent amount is greater than the discharged debt? I already filed and it was accepted by the IRS prior to receiving the 1099-C, just wondered how I should proceed...

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  6. You should amend your return adding the 982 and send it in. Save your records proving insolvency since the IRS has a bit of a track record of asking for them.

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  7. Thanks for all of your advice. If you are currently not receiving a military pension but are active military and will eventually receive one, do you need to include this in your assets?

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  8. No, but you would include the value of your TSP account.

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  9. FYI, Excel-based insolvency calculator available from Zipdebt.com for only $29, saves hours of time with Form 982.

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  10. Thank you so much. This blog helped me greatly. I had spoken to several CPA's and they completely drove me crazy. They were telling me to include all my husband and my assets. We bought a home a few weeks before the debt was written off. The debt was a student loan in my name only and was discharged due to total disability. You were clear and i split everything that was in our name combined in half and it helped me a great deal. I am so happy! thank you

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  11. What happens if I come up with a negative number?

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  12. The cancelled debt is fully taxable (from the insolvency test.) It needs to be entered as other income on your tax return.

    Sorry.

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  13. On the Other Income line enter "Cancelled Debt" as the description and the amount from the 1099C as the value. Some software will start with the 1099C and pull it from there.

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  14. What about a local government pension - a defined benefit plan - that I will receive payments from after I retire.. Does the current value of the pension need to be included in the insolvency test?

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  15. If you have a vested interest, but are not at the age at which you could access the money, then you don't include the value. If you are currently receiving payments from the plan, you include the value that would be required to generate those payments. If you have a vested interest that you are able to withdraw, you include the amount that you are able to withdraw. The answer to your question depends on the specifics of your local government plan. Bottom line: if there is no way for you to get to any of the money as of the date of the cancelled debt, it is not included. If you can get to the money - the amount you can get to is included. If you are receiving periodic payments, the annuity value is included.

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  16. Here's a question. We had a short sale with a first and second mortgage. The first mortgage can be discharged as QPRI but the second can not since it was used to refinance debt. We calculated insolvency from the date of the short sale and found that we were insolvent enough to discharge the entire second mortgage (with about 10-15K room to spare). The only thing is that we noticed the second mortgage listed a different date on the 1099C than the primary mortgage did. The primary mortgage listed the date of the short sale but the second mortgage listed a day about 10 days after the short sale (probably the day they put it in their system). Do we have to calculate insolvency from the date listed for the second mortgage or do we use the actual date of the short sale (The day both banks took their payout and agreed to forgive remaining date)? If we have to calculate from the date 10 days after the short sale, we would not have the debt of the first mortgage anymore and we would end up having to pay taxes for part of the second mortgage.

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  17. If your information is accurate and able to be backed up, you can use the date you know it occured on. Keep in mind that the short sale was a taxable event and you need to report the sale on your tax return. You also need to reduce your basis in the property by the amount of debt cancelled.

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  18. My husband received a 1099-C for an old auto loan. We are filing jointly. When figuring insolvency, how do we list assets and liabilities? Do we only list those that belong solely to him? What if some of each are held jointly?

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  19. You list the full amount of those belonging to him and half of the amount of those held jointly for both assets and liabilities.

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  20. This is a great blog. I have been working with my CPA and your blog answered many questions. I have 10 properties and and am in the process of getting rid of 6 under performing properties. 8 of 10 are underwater and 2 have equity. To date I have 2 that I have Deed in Lieu and 2 were foreclosed, 1 is under contract for short sale and working a DIL for one. I will be claiming insolvency and the number work in my favor.

    Bank accounts, credit cards, loans and auto's are easy to determine value. My question is what will the IRS accept as proof of FMV of my properties? I have heard that BPO's are not accepted - do I need to get full appraisals?

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  21. So we only use our car value at time of discharge on the form 10099-C? I am asking because I need to purchase a different car now since that car is having problems(getting old). My loan discharge was awarded last year(2013) but they are still working on processing all of it at Nelnet(student loans). So they told me I would get the 1099-C this coming tax season instead. I don't know the exact date of discharge because even though they sent me a letter awarding it, they took many months to process it(and may still be processing some) in their system. If I purchase a newer car now(with my disability awarded money), will this newer car be an asset even though it is a year after the initial letter of discharge being awarded? Also, I was in the waiting portion of disability application back when this discharge was awarded, and now recently got approved. So now, they have given me my back up awarded benefit from date of disability onset(thus me being able to afford the newer vehicle). I need to know if any of my current disability benefits or the newer vehicle will be considered income/assets even though the discharge was really supposed to have been "awarded" last year? I can't afford to pay the tax on my student loans that were discharged due to the fact that I am on disability and getting a reliable car is a must with what money I do have now. At time of "awarded" discharge, my car was likely worth 4 or 5 thousand and my student loans were around the 50,000 amount. I also rent, don't own any home or other assets other than furniture from ten years ago..nothing fancy. I also have a dependent child, will that make a difference at all if they do find me liable for a portion of it? Thanks for this post, very helpful.

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  22. You generally have togo by the date of discharge on the 1099C, but if it's out of whack with reality you can request the company to reissue the 1099 with a more accurate date, though they can be a pain about it. They do control the date of discharge since it is defined by the time that they determine the debt will not be collected.

    You can try using the date they told you it was discharged, but if the IRS decides to look at your documentation they will most likely challenge your numbers and go after you for more money. I would gather data based on your estimated date and not worry until you see the actual 1099C. At that point you can decide on the best course. If the date is really screwed up, you might consider getting a local professional to assist you. The expense will probably be worth it.

    Hope this helps

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  23. Are 401k loans included in the liabilities when calculating insolvency?

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  24. 401k balance is an asset while loan against it is liability.

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    1. My husband had an auto loan that was cancelled in July 2013 and we married in Oct 2013 so for 2013 we would file married joint. We live in Texas which is a community property state. Do I still list only his debts/assets in full and ours together at half or being community property state do I list all of them at full (mine and his fully combined)? If you answer I only do our combined as half then I don't need to include my 403b. Correct?

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  25. Thank you for this explanation! When I calculate the gain/loss on the sale of property on Form 4797, the cost basis of the asset sold (short-sale) should be already reduced by the COD income excluded due to insolvency, correct? Also, why would I go through the trouble of calculating insolvency if my rental property qualifies as qualified real property business indebtness exclusion? Thank you!

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  26. I would have the insolvency documentation just in case the IRS disputes the QRPBI. You are correct about the basis adjustment.

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  27. I bought my house for $350,000 and took out a mortgage for it. We later refinanced the house a couple of times to where we currently owe $550,000 and the bank forgave $50,000. What do we use as our basis? The 350k or the 550k?

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  28. When calculating my assets do I include the amount of my IRAs? When the debt was canceled I was 70 years and 2 months old.

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  29. You include IRA's and you include the Fair Market Value of your house as an asset and the balance you owe as a liability.

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  30. How do I calculate all of my credit card debt if were all in collections at the time of the issuance of the 1099-c? And when I find the fairmarket value of my vehicle, do I use the private party or the dealer price?

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  31. You should contact the collection agencies to get the current balance that you owe (they should be calling and hassling you anyway) or your credit report may have the information. Use the private party price.

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    1. Can you include credit card collections that are not from the original creditor? For example, Bank of America debt sold to a collection agency. It is still debt that is owed, regardless of the collector. Just want to confirm!

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    2. You include ALL debt that you owe when determining insolvency. Not just the debt on the 1099C

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  32. I owe 850k on primary residence mortgage. FMV is 456K. Because I owe more than it's worth and can't even sell it, why is it considered an a asset? Would the mortgage interest, property taxes, HO ins, utilities, and maintenance expense for this home be counted toward the liability?

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  33. The FMV is an asset. The mortgage is a liability so the net result is $394,000 towards insolvency. In the insolvency world, this is a good thing.

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  34. So if I understand your post correctly, since I am the debt holder I would calculate my debt only and my assets plus half of any jointly held assets. I would not include my husbands supplemental pension. Also, I receive Social Security Disability. Do I have to do a lifetime expectancy figure on that as well. Thanks so much!

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  35. You have everything correct. As for social security and VA disability, there has been a lot of debate on the subject lately and the honest answer is no one seems to be sure one way or another. I am leaning toward the it doesn't count camp, but until the IRS tries o fought someone who leaves it off and we're see who wins, we won't know for sure.

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  37. Quick question. Back in 9/2014 I was able to modify the loan on my rental/investment property under the HAMP program. According to this program, as long as I pay as agreed they will forgive a total of approx., $83,000.00 over a three year period. Basically forgiving 1/3 of the $83,000.00 a year for a total of three years. Today I received a 1099-C, stating the cancellation of $83,000.00., how can this be correct, as the debt has not really been cancelled yet simply deferred. My first modified payment was 9/2014.
    Amount owed on property approx. 113,000.00
    Fair Market Value: $30,000.00.

    Thanks

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  38. The HAMP program isn't really a tax program so I can't say for sure why they do it that way, but I would assume that's the way the program works. Sounds like insolvency will exclude most of the debt so this will probably work in your favor. Remember that the debt owed and the FMV of the property is included in the insolvency calculation so if you have limited assets aside from the property, you can probably exclude most or all the income.

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  39. Thanks for the blog. This was really helpful as I review if it is worth my effort to go through the insolvency process. My only question is on my home. Would last year's real estate tax burden (which is 1% the fair price valuation of the home) plus the Chase free home value estimator (https://www.chase.com/mortgage/mortgage-resources/home-value-estimator) be a good basis for valuing my house for last year?

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  40. I'm pretty sure the IRS would want an appraisal, which I think is ridiculous, but tax values and online calculators have serious accuracy issues and are pretty unreliable. I would strongly recommend backing up those values with a good set of estimates from an experienced real estate agent using local comps.

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  41. To expand upon the above, the tighter the numbers are on insolvency, the more accuracy you need. If you are tens of thousands of dollars more insolvent than you need to be, you can be more cavalier.

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    1. Thank you for your feedback. I will take your advice and reach out to a real estate agent just to be safe.

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  42. Would a defined benefit pension count as an asset? There is no way to receive money until I retire (which is almost 20 years away).

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  43. Not unless you are currently receiving payments.

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  44. My fiance was a co-borrower in a loan that was forgiven for a family member's home. Is her only chance to not be affected by the forgiven amount to file for insolvency? She DID receive a 1099-C for the entire amount that was forgiven (so was the other family member). Does she include her full 401k amount into form 982 to prove her insolvency?

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  45. That is a great question. The decision as to who the cancelled debt income is attributable to when there are multiple borrowers is a complicated question, but...I usually quickly fall to the test of who actually got the money or property that was related to the debt. In this case, someone else got the home, so it seems obvious that the income should go to the other person. The problem is that the IRS has a 1099C with your fiancé's social security number on it, so their computers will be looking for it. One easy way to handle it (if your software lets you) is to report the cancelled debt on line 21 of the 1040 and then a negative amount equal to the debt saying something like "other borrowers debt"

    The IRS lists some factors to decide who should claim the cancelled debt:
    The amount, if any, you must report depends on all the facts and circumstances, including:
    •State law,
    •The amount of debt proceeds each person received,
    •How much of any interest deduction from the debt was claimed by each person,
    •How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and
    •Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication.

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    1. THANK YOU for your response!

      So other party, with the house, was discharged through bankruptcy. My fiancé will have to report the 1099C and her only option now is to prove insolvency. Her question is now, in calculation her insolvency, does she have to include the fair market value of house (at the time of the forgiveness) as part of her assets? She is technically not on the title of the house. My assumption is that that is not her asset so she shouldn't have to include it?

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  46. If the debt was secured by the house, and the other party had the house and discharged the debt through bankruptcy, they should be including the debt, not your friend.

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  48. If I received a 1099c, that can be considered a liability, correct? I read that in your blog, but wanted to be sure.
    Also, I am leasing a car, is the lease considered a debt or liability? also, is that lease considered an asset in any way?

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  49. How are dependent's (children and adult children) belongings handled on an insolvency worksheet. The cancelled debt is only in my (the parent) name? Thanks.

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  50. I'll get back to you on the lease subject...
    As to children's assets, they are the children's and should not affect your insolvency calculation - though I should point out that the IRS would probably take a dim view of manipulating asset ownership to affect insolvency.

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  51. Here's a link to a great insolvency calculator. It costs $29 (I do not get any compensation for endorsing this) but works remarkably well.

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  52. Oops - here's the link:
    http://www.zipdebt.com/blog/debt-settlement-insolvency

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  53. Thank you for your answers... this last site you posted for the insolvency calculator actually said the magic words for calculating the insolvency... you use the EQUITY of the home not the full value in the calculation. Thanks again, that answered my question.

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  54. Technically the mortgage is a liability and the value is an asset. Make sure you're not including the mortgage as a liability and the equity as an asset - that would double count the mortgage.

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  55. Any news on weather a car lease should be used as debt/asset or not?

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  56. I received a 1099-C in the mail due to a discharged unsecured line of credit belonging to an ex-Spode that my name was also on- I am working on an insolvency worksheet and was wondering if my state teacher's retirement needs to be included as an asset. I can only receive the money if I retire or resign from my job.

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    1. You probably don't need to claim the debt. The ex suppose should claim it.

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    2. You probably don't need to claim the debt. The ex suppose should claim it.

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  57. I was also wondering if the date of my discharge is 12/02/14. Do I use that date to pull up my checking info or December 2014- the date right before the discharge. I need to know the date also to use when looking up my credit card debt at the time for the liability part of my insolvency worksheet. Thank you so much!

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  58. Great blog! Helps clear up a lot of questions. My brother is a carpenter for the state of NY and has an annuity plan that money is paid into and he also has a 401K plan from his previous employment. Are these two items included as assets?? Also, may be a stupid question but I would expect that wages from working are not included as an asset....

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  59. The 401k balance is an asset. The others are not.

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  61. I have applied for student loan forgiveness due to my disability. I receive SSDI. I owe in excess of 33K for my Student Loan. I own a car worth about 14K and it's all paid for. How will this affect being insolvent? I'm considering giving this car as a gift and not making any money on it. I am so confused by all of this. I appreciate any feedback with this. My discharge is currently being reviewed by Nelnet. Should I get rid of my car ASAP (for insolvency purposes?) Thank you for sharing your thoughts .

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    1. Don't do things just for the tax purposes. It would be insane to give up a $14,000 car to save a couple thousand in taxes.

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  62. For purposes of Form 982 Insolvency Worksheet: Does the full value of a TSP account get added to Assets or just the portion the can be withdrawn (the employee contribution portion)? It makes a big difference.

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    1. Any vested amounts (amounts that wouldn't be forfeited if you left your job) should be included.

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  63. Hi, I received 1099c for $23, 000 which is in my name only. I have been married for a long time and my husband has always claimed me as a dependent on his taxes, as I am legally blind .I have just started to receive disability, He no longer works and has no income whatsoever.He bought a house in which we live in 2013 which is in his name only, do I have to declare the house on my insolvency form? We now live in Colorado, Should I file separately or jointly with my husband? Thankyou.

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  64. I’m figuring insolvency for a cancelled debt in 2014 (condo short-sale). In 2007, my boyfriend (husband in 2009) had bad credit, so I took out a car loan in my name only to buy him a new truck. Only my name was on the title and registration…still is. The loan was paid in full two months ago. He made all the monthly payments and it’s well documented with his-bank-to-my-bank money transfers/payments. It’s also documented that he paid all property taxes and DMV registration fees. In figuring FMV vs. outstanding loan, his truck increases my assets by $6000. Does the IRS consider this my asset/liability even though he made all the payments? I ask because, legally, if I sold his truck and took the profit, he could sue me and win because I had no money invested in the property. I can legally sell the truck, but I would have to pay him back. Also, I noticed in a previous answer you said to use the private party value for cars. I used the trade-in value at the time of debt cancellation. Is this ok? I’m not sure how I can go back now and refigured it. Thank you so much!!

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    1. Since community property rules are based on state law, you should seek assistance from an expert in your area.

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  65. I received a 1099-C from a mortgage lender dated for 6/30/14. I received a letter earlier from this lender stating that the loan was being transferred effective 7/01/14 to a new servicer. How can they transfer a loan, then supposedly cancel a debt?

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  66. Mortgage companies are idiots. Most likely they have two division's not talking to each other. Of thru foreclosed, the1099c is what matters.

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  67. I have a state teacher's retirement plan. Although I am 66, I am still working and not collecting from it. Publication 4681 states one must include on the insolvency worksheet as an asset "your interest in a pension plan and the value of your retirement account". Does that include my contributions, employer contributions and interest?

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    1. Whatever value that is in the account that is vested and yours, regardless of if you could withdraw it immediately without penalty is an asset.

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  68. We got a happy-gram from the IRS concerning unclaimed income from forgiven debts on our 2013 taxes. If you could clarify a couple points for me it would be helpful.

    First, we are in an upside-down mortgage. If I understand this correctly, we list the value (not the nonexistent equity) as an asset, and the amount we still owe as a liability.

    Secondly, I am currently receiving retirement benefits from a state public employee retirement plan, but, back in 2013, I was still working, and was not eligible for benefits. The only way I could have touched any of my payroll deducted contributions at that time would have been to either resign or get fired, and either pay the substantial tax penalties or directly roll the funds into another retirement plan. Do I need to claim my portion of the principle in this account and/or the interest if I did not have access to it at that time?

    If I did have to claim that money, do I get to deduct that huge tax penalty from the value? I believe the tax penalty can be at least 30%.

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    1. You are 100% correct on how to handle the mortgage. You also do have to claim the retirement account as an asset, without any consideration of the tax hit. I know that's BS, but it is laid out as the IRS's position on the subject. If my blog post helped, please consider buying my book, making Amazon purchases through the link, or making a donation.

      Also, if the amount in question is large, consider seeking help from a professional since it could save you a lot more than the cost of the assistance.

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    2. Thanks for the quick response. It’s not great news about the retirement, but we do also have student loan debt to factor in with the upside-down mortgage so we still might make the insolvency clause work. What a crazy system we live in where I’m hoping to be insolvent.

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    3. Remember, while it would be nice for insolvency to eliminate all the cancelled debt, every dollar of insolvency eliminates a dollar of cancelled debt from income.

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    4. Good point. If I understand this correctly, we file tax jointly, and we received an IRS notification letter addressed to both of us (it only listed my SOC in the box at the top, but I’m guessing that’s due to there only being room for one). It list one debt for my wife and two debts for me. As I understand it, our insolvency is calculated on an individual basis. As far as the mortgage and value of our home goes, do we each claim half the value and half the liability for this big ticket item?

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  69. In the insolvency worksheet under liabilities,do I only list the debts that were forgiven, or all my debts/liabilities? For example, if I only have credit card debt forgiven, can I still list my student loans in the section under liabilities in the worksheet? For example, in the insolvency worksheet under liabilities student loans are listed. Then it says "Amount Owed Immediately Before the Cancellation." So do I put in the total amount I owe in student loans (even though they are not what is forgiven)? I am just confused as to what you can put in the worksheet: the debt you were forgiven or all your debt? Thank you.

    ReplyDelete
  70. Also, do they really want to know the value of my furniture, crappy 22 dollar toaster, my clothes, underwear and table lamps? Is this a real thing? How is that part of solvency? Do they expect me to sell my personal effects, table lamps, books and 15 year old furniture in order to be solvent? I understand high end items like expensive designer stuff or gold jewelry or cars or Van Gogh paintings mattering etc (not that I have any of those) But personal items? Hair brush and blow drier and what have you? Am I expected to strip my house clean down to the shirt off my back - literally? This is a serious question. I am trying to understand.

    ReplyDelete
    Replies
    1. You include all debts, not just the forgiven ones. You make a good faith estimate of the value of your household. There are some places that can help determine values based on apartment size etc. I will say that if you need to get into the minutiae of the values of individual items, you are probably not insolvent enough to make it worth it. In most cases, before considering household items (other than expensive jewelry, antiques, electronics, etc.) you are either heavily insolvent, or not really close. My best advice (worth what you're paying for it) is to guestimate the value of your household contents, take a video or pictures to prove how nice or crappy, as well as the quantity, of your stuff, and roll with it.

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  71. I completed a short sale on my townhome with a mortgage of 365K. The appraisal was 240K which is what the home sold for. The 1099 will be 125K. Do I list the 240K as Asset and the 125K as Liability?

    ReplyDelete
    Replies
    1. The 240k is an asset and the full 365k is the liability

      Delete
  72. In a scenario where the cancelled debt originates in an LLC as a result of cancellation of indebtedness on a mortgage held by the LLC, the debt would be considered recourse for tax purposes but, is technically non-recourse to the members of the LLC. Would you include such debt for purposes of the insolvency calculation? I am curious about this as the possibility exists for large COD income without the relevant insolvency as a result of the unique situation.

    ReplyDelete
    Replies
    1. I believe the LLC handles the COD at its level based on its solvency and passes the COD to its shareholders on the K-1. But LLC's are not my area of expertise so you should seek extra help

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  73. I have just received a form from irs for a old credit card debt that was agreed and settled for a lower amount then the original balance. this was back in 2013 and im just now getting a letter. they are trying to tax me on the original amount that is not even the settlement amount and the amount there claiming is not even the last amount that was due. im researcning this insolvency, this was a settlement that is still in process of being paid off. I never received a 1099c . they are also trying to include interest from the date the tax return was due until the tax is paid in full , its only 29.00 and the amount is 660.00 plus 29.00 in interests, its a big deal to me, a unemployed mother

    ReplyDelete
    Replies
    1. There was a 1099c submitted to the IRS for the full amount that the credit card company was due, but did not receive. The IRS got it, but you didn't. Insolvency is probably your only out on this one, otherwise the bill from the IRS is probably accurate.

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  74. My student loan was forgiven 40k on 12/31. I m filling out the IRS Form 982 for insolvency. Do I include the 40k as a liability?

    ReplyDelete
    Replies
    1. Yes. Your insolvency is calculated including the debt forgiven. Make sure you get the 1099C to ensure what year their accounting has it in.

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  75. I used a insolvency calculator online. I received a 1099-c for student loan debt, which I included as a liability as well as back tax debt. These two combined are over 100k. my assets are 5k and I earned less,than 5k for that year. Why is it that I have to pay something like 9 hundred dollars?

    ReplyDelete
  76. Based on your numbers, if the student loan debt was less than 95k, you should pay no taxes on the cancelled student loan debt. Either the calculator is messing up, or you have other issues affecting your taxes. I would suggest having the return checked by a professional.

    ReplyDelete
  77. Hi there! Firstly, do know what a great blog you got here! Lots of information and to top it all, it is all in written in such a plain "english" terms that speaks closely to an average non-tax professional like me, so thank you so much for this info and your diligence for responding to your "super" best of your abilities!

    So moving on for a little background: I too have been researching for days, about a month now really, since we've received a CP2000 notice from IRS for a 2013 missing 1099c that we never received which appeared to be an old credit card debt that my wife had back in around 2003 or a little before that.

    And after researching and reading endless blogs online, "googling", and checking out IRS pub forms, the only way to not pay taxes on it is to claim insolvency - which I truly believe is the right way since the debt is under my wife's name - and especially my wife has been unemployed since 2008 (worked only about 2 months that time) and I have been supporting her 100% way back since we officially "got together as a couple" on 2004 and have claimed her as a dependent on my tax return and until after we got married on November 2013 when I finally filed us as married then. And of course, as soon as we finally filed as married jointly, here comes IRS making proposal changes due to a cancellation debt that we were not aware of and never received 1099c but I totally understand now how IRS can still be a pain about this discharge.

    Wife and I talked and she confirmed it was her old debt way back when she was still "young" and was unable to pay. So now IRS has notified us of it and since I am the primary on our first ever tax return as married, and I am the only bread and butter of the family, our house, cars, my 401k from work, and everything we have is all under my name, I technically own all -- so the questions or concerns I have are:

    - Do I still need to list half of those "assets" and or "liabilities" (all of which would only be under my name really) as if it was hers?

    Since we got married before the cancellation of debt event, reported end of 2013 (which btw, I actually do not know the date of event since wife did not ever receive the 1099c and when I asked IRS for more info on the date, they said there was no date listed since they only recieve it electronically and she went on suggesting it as 12/31/2013 as the date of event.

    - So as far as I date, we'll decide to use 12/28/2013 as the day before the event, we will have to assess everything as of that date for liabilities/debts. Do you see any other concerns with this? I am reluctant on calling the original debtor for the record as may not get answer on time

    - For her liabilities, my understanding we'd be able to list all other debts that wife had/have that are in collection? Though we have not heard or receive anything recent this year or during 2014 that we are aware of, can we still list these debts and use the copies of letters she received before as evidence?

    - For Assets, we bought our house back in 2009 all under my name way before we got married, do I need to list half of fmv property for 2013 even though it isn't under her name? We are in Washington state where community property is potentially a factor too

    - For assets, since appliances, furnitures, tvs, etc. are technically something I own, do we still list half of the fmv as part of the insolvency?

    - Regarding 401k, it is through my work and all under my name. Is it correct that this should not be listed or do not factored in for her insolvency?

    Hopefully this all this make sense. And would greatly appreciate your super best input at your earliest convenience. Be great to hear from you soon as I am gettinng so close to the date that we need to have our response back to IRS, by December 4th to be exact :)

    So thank you thank you for taking time to read and for any response you can provide!!

    P.S I apologize for the long write up

    ReplyDelete
    Replies
    1. Since Washington is a community property state I see you having two choices. One is to seek the admittance of a tax professional in your state since the effect of community property can be complicated and I don't know them well enough to advise you accurately (though my guess is they would prevent insolvency claim). The other is to get an accurate date on the 1099c. If it is before the date of marriage everything is easy. The date should be on the 1099c and the IRS should have it. Contact the debtor and also download her 2013 wage and income transcript at irs.gov. It is easy to find on the main page under tools. Labeled Get a Transcript.

      Hope this helps. Please consider buying my book and telling your friends as well...Everyday Taxes 2015.1

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  78. Thank you for your input! It is greatly appreciated! And definitely be checking out your book and recommend this blog to friends and families :)

    I was able to contact the creditor for the date the account was abandoned and they said it was dated for January 31, 2013, which sounds like good news since this is way before we got married. So with that, I hope this is still would make it easier, like you said right?

    Also, she did not file 2013 tax as we filed as married filing jointly for that year, and I have that copy. I file my/our own tax using online tax to efile. My wife hasn't filed taxes on her own since she had no source of wage/income at all to report and I have had her on my return as dependent in the previous years and then finally filed as married filing jointly for the year 2013. She is stay-at-home wife/mother. Is there specific things I need to look at or call out to include when I respond to IRS CP2000 notice aside from filling out form 982 and working on the insolvency worksheet?

    And now that I have the accurate date, what else can you advise with our situation and per my previous comments?

    ReplyDelete
    Replies
    1. Technically all you need is the 982 and a quick letter. I would include the insolvency worksheet.

      If you email me at taxadvisor@email.com, I will send you a basic letter that you could use.

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    2. Awesome! i just sent you an email :) Truly appreciate it!

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    3. Hi there! Just wanted to say a big thanks again for your help. Your inputs made me feel more better and confident to get to the next steps. And oh I finally got response from IRS and was able to squared away this issue without owing anything! Thank goodness! And lastly, finally got your tax book, delivered Friday. Now, just need time to read up on it and looking forward to help guide me through this tax season again!

      Thank you again!

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  79. Glad I could help! Thanks for buying the book and if you like it, give it an Amazon review. Thanks

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  80. Thank you for your blog! Just trying to figure all this tax stuff out now that we got a 1099-c for 32k. Would a home we short saled but did not live in for a few years since we had to move out of state still count on the asset side of things for the worksheet?

    ReplyDelete
    Replies
    1. The value counts as an asset and the debt counts as a liability.

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    2. Thank you! Ok So if we owed 190k and the FMV is 190k (though it sold for 170k). In liabilities we put 190k as well as the 32k from the 1099C and then in assets we put 190k?

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    3. I would probably argue that the FMV is what it sold for, but be prepared to fight the IRS on that point. So I would put 190k as liability and 170k as asset.

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    4. Thank you! 190k was what we owed combined to the 2 mortgage companies at the time of short sale. Do I add the 32k to that or is that just assumed in the amount we owed? Because it wasn't our primary residence.. are we disqualified from insolvency?

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    5. The 32k is included in the two mortgages, so don't add it in. Insolvency is independent of whether it was your residence.

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    6. Ok thank you! Hopefully last questions for you. My husband and I both got a 1099-C form. But we bought the house together and were married and have always filed jointly so do we have to each claim the 32k bc they sent us separate ones? Also if we can only prove 20k insolvent.. are we then just responsible for the 12k or are we stuck with it all?

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    7. Figure your insolvency separately using half the values for jointly held assets (unless you live in a community property state - in which case get pro help). Any cancelled debt in excess of insolvency would be income.

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  81. My wife bought a house about 10 years ago with her boyfriend at the time. They split and and she signed a quitclaim deed although her name was still on the mortgage. (Worthless in our current situation). She and I married about 5 years ago. I bought a house a few years back and subsequently placed her name on the deed in an attempt to avoid probate hassles in the event of my death. We recently became aware that her ex boyfriend has successfully filed chapter 11 and defaulted on the house. He has until the end of March to vacate. I'm sure we will get a 1099 some time later this year. If so, we intend on filing separately next year with her filing insolvency. My question pertains to our current house. Does she need to include the equity when she files considering the title is joint and the mortgage is in my name only? I VERY much appreciate your help. Thanks in advance and also thank you for your service!

    ReplyDelete
    Replies
    1. Debt cancelled in chapter 11 bankruptcy is not counted in income. It is one of the allowed exclusions: https://www.irs.gov/taxtopics/tc431.html

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    2. I understand. My wife's ex boyfriend filed chap 11...she didn't. They were both listed on the loan. The main question is whether she has to declare the equity and debt of our current home as described above when she files insolvency?

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    3. The answer to your question is not something absolutely certain, but my entering arguments would be thus: She is not responsible for the debt, so it's not hers. She has an ownership interest in the house, so that is certainly an asset. That said, I could make the argument that the house is encumbered by the debt, such that if it was not paid, her equity is at risk. Based on that I would include half the equity and half the debt on her insolvency worksheet, with the understanding that the IRS might disagree.

      On top of that, you do not need to file a separate tax return to separate assets for insolvency. Insolvency is inherently a separate thing, except in community property states, so you can file jointly, but calculate insolvency for her alone. If you live in a community property state, I beg you to seek professional help with this.

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    4. Hi there, I have a similar situation. I am disabled vetetan, received a 1099C for cancelled student loans. My husband is the only who works, we have 5 kids. We usually file married filing joint. Well since I have received this 1099C I am trying to figure out what is the best way to file this year. Since I don't have actually taxable income to report, can he file alone so we can get most of our tax returns? And can I just send in form 982 and all supporting documents to IRS just like that since there is no need for me to file 1040? Is that smart? Also, I have a fair amount of debt liabilities to include forgiven debt about 65000 all together. My husband holds mortgage and title to our home, although my name is on the title. Is that considered an asset for me to claim insolvent? What do I do and how do I file our tax returns?

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  82. first thank you for your blog! we did a short sale of our rental duplex in november 2015. we received a 1099C from the bank. it lists $65746.32 as the amount of debt discharged and $49000.00 as the fair market value. we owed $104000.00 on our mortgage at the time of the short sale. would the $65000.00 be listed as an asset and the $ 104,000.00 be listed as the liability on the insolvency worksheet? or does our property fall under the qualified real property business indebtness exclusion? and if that is the case do we need to list our cancellation of debt amount as income? thank you for all of the help it is greatly appreciated!

    ReplyDelete
  83. I had partial debt cancellation on six different credit cards over an approximately two-month period in 2015. A relative lent me $40K for the specific purpose of making the debt settlements (a note on the wire transfer even indicated this). Does that $40K count towards my assets for the solvency test? Do I need to do the worksheet 6 times? Once for each of the 6 settlements over the 2-month period or is there a way I can combine all 6 and give one date? Thanks!

    ReplyDelete
    Replies
    1. Whatever cash you had remaining from the 40K on the date the debt was cancelled is an asset. The 40K you owe is technically a liability, but the IRS might argue that it was closer to a gift than a loan if there is not a true obligation to repay, and an appropriate interest rate being charged - all of which entails issues of gift tax and/or interest income for the lender. Talk to a professional.

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  84. Received 1099 C for $39,994 from a mortgage company. Liabilities including the 1099 C amount would be @ 55,000. At the time I had about $5,000 assets not including assentials.. Don't own a home or a car, furniture is 20 yrs old.. would you say i was Insolvency? PS.. my mother lives with me and i have 1 child.. their personal items would not be included, correct? what is the % rate for audits on 982 forms, just a guess?

    ReplyDelete
  85. I would not hazard a guess as to whether you were insolvent based on a blog post comment. If you truly had $55,000 in debt and $5,000 in assets you would be insolvent, but I will not venture to make a positive statement if YOU are insolvent. As I have said repeatedly - insolvency is complex. If you have a slam dunk level of liabilities versus assets, it can be easy, but if it's close, you should seek professional help and get EXACT values for assets and liabilities on the date of debt discharge. Rate of audits is irrelevant unless you plan on lying. If you have the FACTS in your favor, an audit shouldn't be a huge concern. Talk to an expert on this in your local area and ask him or her how solid your case is.

    ReplyDelete
  86. Received two separate 1099-c forms, both of which have the same date of 12/31/15. They are both for cancelled credit card debt, and both are from the same bank (just two different credit cards). Do I need to complete an insolvency worksheet separately for each 1099C, determining insolvency separately for each forgiven debt. OR - do I complete one worksheet and determine insolvency towards the combined debt? Either way, the insolvency worksheet will be identical (with the same assets and liabilities), but it will make a big difference if comparing to each individual 1099C rather than the combined total. Thanks!

    ReplyDelete
  87. Calculate insolvency once, including both cancelled debts as liabilities. The cancelled debt can be excluded from income to the extent that it exceeds the TOTAL debt cancelled. Example: 1 debt is 2000, the other is 3000, you are 4000 insolvent - cancelled debt income is 1000. If insolvent more than 5000, no cancelled debt income.

    ReplyDelete
  88. I just found out I could file for insolvency after I did my taxes in the end of January. Which states I owe 11k in taxes for student loan discharge. So, I just recently sent the a corrected 1040X to the irs which included my inslovEncy worksheet and the form needed. My question is would sending a corrected 1040X for insolvency effect my initial filing? That states I owe 11K. Also will the IRS send me a letter telling me if they approved the the amended return claiming inslovency? Thanks for any info.

    ReplyDelete
    Replies
    1. Assuming you did the amendment correctly, you should be fine. Should get a letter but the IRS can be sketchy about them.

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  89. I appreciate this information. Trying to digest it all. My question is, I receive Social Security each month, as well as a pension from the state as a retired teacher. How do I figure this into my assets? Thank you.

    ReplyDelete
  90. I appreciate this information. Trying to digest it all. My question is, I receive Social Security each month, as well as a pension from the state as a retired teacher. How do I figure this into my assets? Thank you.

    ReplyDelete
    Replies
    1. The Social Security is most likely irrelevant, but the Teacher's Pension almost certainly disqualifies you from insolvency. The pension is an asset equal to the amount of money you would need to generate the annual income in the form of an annuity.

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  91. Thanks for the blog. Have been reading IRS publications and researching the internet but can never seem to find a definitive answer.

    My wife purchased home in WA wife prior to marriage.
    We have since moved to Florida and the home in WA was foreclosed this year.

    All current assets are in my name (house, cars, etc) except for joint bank account and non-marital assets such as jewelry. My wife has not worked since 2012 and all monies used to purchase said items were from my single income.
    My question is really the calculation of assets when determining her insolvency.
    Does she get stake in the equity of the home, cars, etc. even though she is not the lien holder and her income did not contribute to the purchase?

    Thanks

    ReplyDelete
    Replies
    1. Since Florida is not a community property state, only assets in her name count for her insolvency.

      Delete
  92. Your article states future VA disability benefits have to considered assets? Life expectancy?? I do not see this anywhere on the insolvency worksheet. Are you sure? Could you direct my attention to the IRS policy? Thanks

    ReplyDelete
    Replies
    1. The subject of VA disability is very much in dispute and has not been litigated. The general feeling I'm getting from tax practitioners and other experts is that it should not be considered as an asset. The important thing to understand is that we don't know what the IRS thinks the right answer is.
      I'm advising my clients that it is not an asset, but that they need to be prepared if the IRS decides to fight it and understand that if it is considered an asset, the cancelled debt would most likely be fully taxable.
      Run your tax return with and without the debt as income and based on that be aware of what your potential risk is.

      Delete
  93. Seems to me that a "pension" MAY be considered an asset. But considering the disability payments for a Marine that got his legs blown off an asset? I can't imagine. That's his means of survival. Based upon that logic, everyone's potential future earnings would have to be considered and asset... thanks for your response.

    ReplyDelete
  94. the 1099c does not include the interest but on the date of the cancelled debt the total i owed included the interest ..so can i put the total with interest on the worksheet??

    ReplyDelete
  95. Good afternoon,

    First I want to start off by saying think you, your blog website super tax genius is a god send. Like most of your readers I have been studying this 1099 c, IRS form 982 and insolvency work sheet.

    Question: I did my 2011 on line with TaxUsa software, on form 982 checked 1b, line 2 the full debt amount , line10a the same full debt amount shown up. I was wondering should line 10a be blank or 0 or full debt amount that appears?

    And I understand that you have a sample letter for insolvency? Can you please forward this to me. I have a deadline to send all items in my Wednesday April 6, 2016. And any suggestions would be great.

    Kindest Regards,

    ReplyDelete
    Replies
    1. I sent you an email today with questions and answers. As to the 10a question, for most people the full amount of the excluded cancelled debt would go on that line.

      Delete
  96. Hello,
    I received a 1099-C on a junior lien on a rental property that was foreclosed in 2009. I incurred a loss and excluded the COD from my 2009 tax return. Can I use this same information, Form 4796 to show/support my insolvency status back then for 2015?

    ReplyDelete
    Replies
    1. You need to calculate insolvency on the date the debt was cancelled based on the 1099C, or you need a corrected 1099C. Good luck with that. This is where the entire cancellation of debt tax system falls apart. The owner of the debt takes their sweet time cancelling it, and the cancellation has effects on something that occurred 6 years ago (basis reductions). There's literally no way of doing this 100% accurately.

      That said, the company supposedly was still trying to collect for the last 6 years, so it technically wasn't cancelled until 2015, so you need to calculate insolvency on the date they decided to stop trying to collect.

      Delete
    2. Thanks for your reply. If IRS gets back to me, what documentation can they request to prove insolvency? I was thinking of sending them a copy of my 2009 Form 4797 as proof that I was insolvent back then too. Do you recommend attaching a cover letter with my FORM 982?

      Delete
    3. If you are filing the original return, not in response to an IRS letter, file just the 982, preferably electronically. The IRS can ask for documented proof of any assets or liabilities on the insolvency worksheet. This includes bank statements, credit card statements, Kelly blue book value printouts, loan documents, 401k statements etc. You should be prepared with all these documents on or near the date on the 1099C, just in case. Obviously, the extent to which you are insolvent matters. I have a client with $250,000 of student loans and a car. Obviously proving his insolvency is a slam dunk, so we just printed the loan balance on the date of the 1099C. If you are close, you need really strong documentation.

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    4. This comment has been removed by the author.

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    5. This comment has been removed by the author.

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    6. The 982 is no more of a trigger than anything else. They won't care that the foreclosure was 6 years ago, though in a face to face audit it might get you some sympathy.

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  97. should leased vehicles be included as an asset?

    ReplyDelete
    Replies
    1. There is very little discussion on this, but I would consider it nether an asset or a liability.

      Delete
  98. I receive SSDI, and was approved for Student Loan Foregiveness. Should I expect to see a 1099C? Also, I was approved for Federal Tax debt forgiveness...will I receive a 1099C for this debt foregiveness? I am 50 years old and received a notice for a pension payout opportunity in the form of a lump sum, or annuity. If I act on either of these options, will the pension money be taken by either of these entities (Federal Student Loan forgiveness program or IRS Tax forgiveness programs)?

    ReplyDelete
    Replies
    1. You will almost certainly get a 1099chance if they cancel your student loan. Almost certainly not for the taxes forgiven. I cannot answer whether they will go after your pension as it is not a tax question and thus outside my area of expertise.

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  99. I received a CP200 for 2013 zombie credit card on two separate 1099-c both for cancelled credit card debt, with same date of 12/31/13. I was insolvent and did the worksheet determining insolvency for credit card debt (86k). But what are my consequences, if I file insolvent? My mom owns a house (80k) asset my name is also on it, If I include it can she lose it? Thanks!

    ReplyDelete
    Replies
    1. Including a house in your name on the insolvency worksheet is required, at least to the extent you own it. I can't say whether that will impact her ownership as that is not a tax question. If the asset is in your name you include it. I would be worried more about your insolvency claim being denied more than losing the house.

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    2. Including a house in your name on the insolvency worksheet is required, at least to the extent you own it. I can't say whether that will impact her ownership as that is not a tax question. If the asset is in your name you include it. I would be worried more about your insolvency claim being denied more than losing the house.

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  100. This comment has been removed by a blog administrator.

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  101. Hi,

    I received a student loan discharge (for $5,170) and the 1099c in 2014. I filed the 982 under insolvency because I owed $38,000 in student loans immediately before the discharge and my possessions were about $3500 (I lived in a room).

    Received IRS notice saying I owe them tax on the amount, but they are not asking me to prove that I was insolvent. They're just asking me to pay (about $1800) or dispute. I still have the worksheet showing my insolvency. If I sent them that worksheet would that be sufficient? Or do I need to send them any other supporting docs?

    Thanks!

    Toni

    ReplyDelete
    Replies
    1. I would send a polite letter explaining what you did and a copy of the insolvency worksheet. They may close the case on that our ask for more documentation. Work on locking up documentation while you wait for a response.

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    2. You are the best. Thank you.

      Delete
  102. This comment has been removed by the author.

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  103. Thank you for this blog, and all the information included within. This is a fantastic resource. My question is around accuracy of the accounting. I received a notice from the IRS regarding an unreported 1099-C from Sept. 2014. I have a pretty good idea of all assets and liabilities around this time, but cannot be 100% sure about all dollar amounts. My insolvency amount based on a quick calculation is very high and more than covers the forgiven debt. How accurate does my data need to be on my worksheet, for instance if I owed $543 on a credit card but I estimate that it was $500 could that be a problem?

    Also, I had two reposessions of which this 1099-C is one of. Both cars were repossesed years earlier and neither where in my posession at the time of this 1099-c. Do I include the values of both vehicles in my asset calculation?

    Thank you again for this blog and I appreciate your response.

    ReplyDelete
    Replies
    1. If you are deeply insolvent, you can be a bit more cavalier with your numbers, though I would always attach a letter explaining in words why you didn't include the cancelled debt (didn't get 1099-C), explaining how you calculated insolvency and that some numbers are estimated but that there can be no doubt you were insolvent, and thanking them for their time and providing updated contact information.

      I would include both cars.

      I would also attempt to gather and retain evidence supporting the worksheet even after I sent the worksheet and letter since the IRS can ask you to prove the numbers.

      Hope this helps.
      If you buy from Amazon, please use the search link.
      Thanks!

      Delete
  104. 've been searching the internet for an answer to my situation but can't find a clear answer. Father passed away in 2015, and had an IRA worth $300K with mom listed as beneficiary. The student loan debt for my sister was discharged in 2015 shortly after his death because he was on the loan. Does the $300K IRA have to be listed as an asset for the insolvency calculation attached to the 1041 Estate Income Tax Return, or is it deemed to be an asset of my mother on the date of my father's death.

    ReplyDelete
    Replies
    1. Did you get a 1099C for the cancelled student loan debt? I didn't think discharge at death generated a 1099C, but could be wrong...I am the 1040 Super Tax Genius, not the 1041 STG ;)
      If you got a 1099C, you will want to talk to an estate tax professional - this is not something you want to try to do yourself via the internet.

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    2. Got it. Thanks for the quick reply!

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  105. I received a CP2000, for cancelled credit card debt 1099-C, I was insolvent sent 982, 1040X and insolvent worksheet they accepted. Is that it?
    Or will comeback in a few years?
    Do I have to surrender property?
    If so when?
    Do they contact me about liquidation or that is only for business?
    Thanks!

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    1. You should be okay.
      Property surrender is not a part of the taxes.
      Theoretically, your basis in things you own was reduced, making future sales of stuff "more" taxable. In reality, unless you have a business, or collectibles you might one day sell, you will probably never have to deal with this, and most people wouldn't have the first clue how to handle it anyway, or remember they should be doing something. I would relax and be glad it's done.

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    2. Thank you!!!
      It is nice to hear!!! I have been worried; I would get a knock on door and they would say,"Get out!......let sale everything like you see on TV; Even though, no one would buy it because it is worn out and super old."

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  106. Great blog with a lot of good info. Two questions:

    1. How do you account for a reverse mortgage on the insolvency worksheet? Is it disregarded all together as an income stream and the home also not listed as an asset?

    2. Any suggestions when there is a lack of records to verify value of assets and/or liabilities?

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    Replies
    1. Reverse mortgage borrowed amount is a debt (there is an underlying cash value generating the stream) and the house is an asset.
      You have to do your best if records are missing. A credit report can be helpful, as well as contacting the creditors. Sales websites are great sources for values - ebay, amazon, craigslist.

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  107. Appreciate your willingness to assist in this forum. I see you advise inclusion in the insolvency calculation of 1/2 of jointly-owned assets of H&W, when H&W file as Married Filing Jointly. Does your response change if H & W file as Married Filing Separately? (W has no income, and will file "ZERO" returns as MFS--she is sole owner of the residence, and wishes to protect same--H has pre-marital tax debts, and potentially post-marital.)

    Question 2: In anticipation of H owing additional post-marital taxes, IRS has requested completion of Form 433F to determine eligibility for Installment Agreement. When H lists monthly living expenses, may expenses for both H&W be included, as H provides her total support? (Again, under the scenario where H&W use MFS filing status.

    Many many thanks for your assistance, and for the articles and Q&A which you publish with this blog. I look forward to your response.

    ReplyDelete
    Replies
    1. Distribution of assets is based on ownership and is independent of filing status. Same with 433F.
      That said, I advise filing married filing jointly unless there is a compelling reason not to.

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    2. Thank you for sharing your super tax genius knowledge. Compelling reason for MFS is to protect W, as sole owner of residence, from any liability for H's additional taxes due from 1099-C COD income.

      Do you have experience with discharge of (income) taxes through Ch. 7 Bankruptcy, or do you know of any particular websites you might recommend? Again, thank you.

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    3. Only the tax side...that is that bankruptcy is generally a valid exclusion for cancellation of debt income.

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    4. Thanks for your response; I hope you had a wonderful holiday, and wish you the very best in the coming year.

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  108. This comment has been removed by a blog administrator.

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  109. I received a notice from IRS stating that I couldn't claim insolvency on rental property on form 982. They stated that insolvency could only be used for personal property, not business property. How would you respond to that?

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    Replies
    1. I would respond that their position is not supported anywhere in the code or their own guides. I would refer to the linked audit guide and refer to the table which clearly states that insolvency exclusion MUST be applied before any business exclusions. Hope this helps...and buy my book!
      https://www.irs.gov/businesses/small-businesses-self-employed/foreclosure-atg-chapter-3-irc-108-exclusions-from-gross-income

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  110. Thank you for all of your great insight and advice. I have a couple questions that would help greatly. I am a single father of two and I'm looking to claim insolvency after trying to clear debt after settling two loans last spring.

    1.) I own a mobile home with my ex-spouse both our names on the title. Only me and my two children reside there at the moment. However when I do eventually sell the sold amount will be split between her and I. Can I claim and provide only half the value currently at $16,500 with the home market value at $33,000 towards insolvency?

    2.) I used a debt settlement company to settle the accounts. Can I deduct the fees charged by the debt settlement company towards the taxes owed on the settled debt?

    I appreciate any advice or feedback you may be able to provide thanks again Joe

    ReplyDelete
    Replies
    1. If you have a divorce decree or other legal document staying she is entitled to half when sold I would say include half...no paperwork means it's all yours. If you have cancelled debt income after insolvency you can deduct the fees since they were a cost to generate taxable income. If you exclude all the debt from income, no deduction of fees.

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  111. I received a 1099c in mail on credit card debt Im single and dont really own anything other than old jeep that dont run and have other credit debt also along with a personal loan which havent been able to pay on either over 6years and only made income all year of 17,000 can I claim insolvency since debt was over 18,000 with interest on other line over 3000 curious in wv

    ReplyDelete
    Replies
    1. Should work,but you'll need to fill out the worksheet to be sure

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  112. Also if i dont receive other 1099c in this year can i still claim insolvency for following year or will this affect me

    ReplyDelete
    Replies
    1. Assuming your debt to asset ratio remains the same...yes

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  113. I received a 1099-c for student loan debt being discharged. I had a bankruptcy discharge earlier in the year so the only debt left was student loans & a vehicle. I do not work, but my husband does & we always file MFJ. I'm not on the mortgage, but I'm on the deed. Do I have to include the house? If so, do I do 1/2 of the FMV or the equity? Also, do I include joint household assets? It's not much, but wondering about TV's, cameras, etc.

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    Replies
    1. I would include half the house and half the debt, though that's interpretation not fact. Also half the household stuff.

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  114. Dear God help us. We have debts (liabilities) of 271,470 and assets of 76,905. The bank is forgiving us 115,755. Do I owe uncle sam money? The amount of our insolvency (line 38)came out to 194,565.

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  115. Shoot, forgot to ask: Both my husband and I got the same 1099-C with the same amts of 115,755. What do we do now??

    ReplyDelete
    Replies
    1. You should both be safe. Fill out forms 982 with the insolvency amount when you file.
      And buy my book ;)

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  116. Thanks for the great info. I'm working on my insolvency worksheet and have two questions.

    Do I include a timeshare ownership as an asset?

    I am a co-signer on a mortgage for a house I previously co-owned. Around 2010 - 2012 I signed a quit-claim deed and am no longer on the deed of the home; however, I'm still liable for the mortgage and it appears on my credit report. Can I count the mortgage as a liability without claiming the home as an asset since I no longer have ownership rights?

    ReplyDelete
    Replies
    1. Timeshare is an asset, but probably worth a lot less than you bought it for.
      Nothing from the house, asset or liability

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  117. Enjoy all your info, didn't see this discussed. I had a foreclosure on an investment house. It was a former primary residence, we let family members live there on and off rent free. Couldn't financially continue so gave it back to mortgage company. We were under water. The mortgage company bought the house themselves at the auction for $80,000 less than FMV. We received a 1099A used it on my 2015 taxes with capital loss. The mortgage company sold the house in Feb 2016, For $ 10, 000 more than they had paid at auction. We received a 1099C, I need to try to do insolvency I understand I can use the forgiven debt as a liability. My question is since the mortgage company bought the house in 2015, and changed the title to theirs , when doing my assets can I not list that property's fmv as it was not my property on the day prior to the forgiveness of debt.

    ReplyDelete
    Replies
    1. Essentially, you include the amount you were upside down on the house. You can't include the full debt and not the underlying asset value.

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  118. I thought the amount on line 2 of 1099c was what my forgiven debt is? And that amount is what Irs will expect me to claim as income? Is the upside down amount what is listed on the 2099a or 1099c both gave a fmv each different? Thank you

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