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Form 982 CPA discusses the IRS Insolvency Worksheet | Form 1099-C tax reporting

Form 982 CPA

Here are a fe tips on using the IRS Insolvency Worksheet and the Insolvency exclusion of Form 982. Need help with your cancelled debt tax return? Call (910) 399-2705 for a free consult.

As a Form 982 CPA I field lots of calls about the IRS Insolvency Worksheet. So I’ll offer an over view of Form 982, concentrating on the Insolvency exclusion.

  • Many Folks seem to think Insolvency is the only Form 982 provision that keeps the amount in Box 2 of Form 1099-C, Cancellation of Debt, from becoming taxable income. Not true.
  • Many Folks don’t realize that S Corporations and Partnerships also use Form 982, Reduction of Tax Attributes. The tax reporting rules get complex here.
  • Many Folks don’t realize the future tax consequences of Form 982. It’s not always a free ride with the IRS. See the last paragraph below.

The Form 982 exclusions:

  • Bankruptcy.
  • Insolvency. This provision is the only Forms 982 exclusion that require an IRS Insolvency Worksheet
  • Discharge of qualified farm indebtedness.
  • Discharge of qualified real property business indebtedness.
  • Discharge of qualified principal residence indebtedness.

Sometimes you use multiple Form 982 exclusions.

“Don’t pay taxes on personal credit card cancelled debt or student loan cancelled debt without carefully exploiting the IRS Insolvency Worksheet and Form 982.”
– Gary Bode, IRS Insolvency CPA

Individuals mostly use the IRS Insolvency Worksheet for:

  • Cancelled credit card debt. Here’s a comprehensive example for personal credit card cancelled debt with good examples of The IRS Insolvency Worksheet and Form 982.
  • Student Loan cancelled debt. Here’s an example of the tax reporting for student loan cancellation of debt from Form 1099-C, through the IRS Insolvency Worksheet, through Form 982 and finally to Form 1040. Hopefully you won’t need the Form 1040 info.

The IRS Insolvency Worksheet

You’ll find the IRS Insolvency Worksheet in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, along with partial examples of Form 1009-C, the Worksheet and Form 982.

  • The IRS Insolvency Worksheet uses Liabilities (what you owe) and Assets, the Fair Market Value of what you own.
    • Insolvency for Form 982 doesn’t use income, or future potential income. You can make $400,000 or $15,000 per year, it doesn’t matter.
  • The IRS Insolvency Worksheet calculates a number called the amount of Insolvency.
    • You can exclude cancelled debt from Box 2 of Form 1099-C up to the amount of Insolvency on the bottom line of the worksheet.
      • If your amount of Insolvency is $25,000 and your cancelled debt is $15,000, Form 982 allows you to exclude the entire cancelled debt on Form 982.
        • The additional $10,000? It’s irrelevant.
      • If your amount of Insolvency is $25,000 and the cancelled debt is $45,000 you can exclude $25,000 from taxable income on Form 982.
        • The additional $20,000 from Form 1099-C becomes taxable income.

Soft numbers on the IRS Insolvency Worksheet

I recommend documenting what you can in case the IRS audits you. I imagine they look at Form 982 returns carefully.

  • Use your bank statements to document cash.
  • Use a loan amortization schedule to document things like car loans.
  • Save your calculations for things like accrued real estate taxes.
  • Save invoices to document things like accrued child care expense.
  • etc.

But there are plenty of soft numbers on the IRS Insolvency Worksheet too:

  • What’s your house worth. There’s no way to be sure unless you sell it.
  • What’s your Household Goods worth?

I think a good Form 982 CPA helps you find legitimate numbers. Here’s  link to a site that gives specific examples of the IRS Insolvency Worksheet line by line including partial year calculations . It includes the Reduction of Tax Attributes part too.

Reduction of Tax Attributes: tax consequences of Forms 982

If you exclude $50,000 of cancelled debt in Box 2 of Form 1099-C on Form 982, you must reduce your tax attributes. Tax attributes sorta kinda means what you paid for something.

So let’s say:

  • You excluded $40,000 of cancelled credit card debt in 2014 on Form 982.
  • You own a rental property that you paid $25,000 for.
  • Form 982 makes you reduce that purchase price by $20,000 for 2013.
  • So there’s no immediate tax consequences.
  • When you eventually sell the rental property you’ll pay tax on $20,000 more gain on the sale or $20,000 less deductible loss.
    • Sometimes Form 982 just delays the tax consequences of cancelled credit card debt.

Our virtual office means we can you with a cancelled debt tax return regardless of where you live. There’s maybe a hundred or so posts on various aspects of cancelled debt, Form 982, Insolvency, reduction of tax attributes, etc. If you like what you read, distance isn’t an issue.

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4 comments to Form 982 CPA discusses the IRS Insolvency Worksheet | Form 1099-C tax reporting

  • CTGUY

    Gary,

    I have question on recourse COD. Here it goes the property is a duplex half primary for first 3 years half rental. The 1st floor changed from primary to rental for the last 3 years. The total COD is 180,000 the mortgage is 239,000 my depreciation is 30,000 and the FMV/sales price is 47,000 that gives me an adjusted basis of $209,000 and a sales price of $47,000 gain or loss of $162,000 my question is now if I take out the COD of 180,000 i go from a 162,000 loss to a $18,000 gain. How should I report this ($162,000) loss on Sch E with form 982 with ordinary income on 1040 for the COD of 180,000 or 18,000 gain on Sch E with the exclusion that I lived in the unit for 2 of 5 years? If I report it on Sch E do I also need to report on Form 982? BTW I am not insolvent and have positive equity on the insolvency worksheet of approx $13,000. Thanks Gary BTW I am a CPA mostly audit though and this makes my head spin.

    • Hi Keith: well this is more than what I consider a comment. But let’s see what I might help with. Schedule E and Form 982 aren’t related. Form 1099-C, Cancellation of Debt, incurs COD. It’s not clear if you received that. Sort of sound like you just received Form 1099-A. The loss is ordinary loss. Hope that helped. Form 982 has multiple exclusions Insolvency is just one of them. If this for you personally, call after 8PM ET and maybe I can do more Keith. 910-399-2705.

  • LARRY PEEPLES

    ON ’12 RETURN ENTRY FOR LINE 10 INADVERTENTLY OMITTED, RECEIVED NOTICE THAT COD WOULD BE INCLUDED IN INCOME AND TAX IS DUE. GIVEN OPTION TO DISPUTE OR AGREE. WHAT IS MY REMEDY. WHEN THEY ASK FOR A BREAKDOWN OF TOTAL ASSETS & LIABILITIES, DOES THAT MEAN A COMPLETED INSOLENCY WORKSHEET OR SOMETHING WITH LESS DETAIL.

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