This tax worksheet calculates a taxpayer’s insolvency for purposes of excluding cancellation of debt income under IRC Sec. 108. A debt includes any indebtedness whether a taxpayer is personally liable or liable only to the extent of the property securing the debt. Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan ...
How do I fill out an insolvency worksheet?
In filling out the insolvency worksheet, make sure to list all the assets and liabilities, including some that you might not consider at first glance, such as money in your 401 (k). Consider the help of a qualified debt professional in going through the list of all your assets and figuring out which ones you can include in your worksheet.
Is Cancelled Debt taxable due to insolvency?
When a debt is canceled, the lender will typically issue Form 1099-C to the debtor. In order to show that the insolvency exception applies and some or all of the canceled debt is not taxable due to insolvency, the debtor needs to complete Form 982 and mark the box that says, “Discharge of indebtedness to the extent insolvent.”
How do I explain insolvency to the IRS?
For example, if your total liabilities are $8,000 and your total assets at the time are $6,000 you are insolvent in the amount of $2,000. To determine the value of your assets use the fair market value rather than what you paid for them or what you think they are worth. If you are insolvent you need to explain this to the IRS in one of two ways.