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What is Insolvency for IRS Form 982? CPA accountant explains debt cancellation, debt forgiveness and Tax Form 1099-C

Insolvency and Form 982 CPA accountant

Tax Form 982 may allow exclusion of debt cancellation, on Form 1099-C, from taxable income. (910) 392-2705.

I’m a debt cancellation CPA specializing in tax Form 982 preparation, including the insolvency calculation. Our virtual office can serve you wherever you live. I’ll try to explain the entire debt forgiveness process by answering common questions. I hope it helps.

The debt cancellation process: from cancelled debt and Form 1099-C to Insolvency on Form 982

What is cancellation of debt?

Your bank officially writes off or “forgives” some or all of what you owe them. Common events include foreclosures, short sales of rental property, cancelled credit card debt, car repossession, etc.

What is tax Form 1099-C?

Once the bank writes off your debt, they send both you and the IRS Form 1099-C. This reports the amount of debt cancellation (i.e. debt forgiveness) and other information.

The amount cancelled debt on Form 1099-C becomes taxable income…

The IRS makes cancelled debt taxable income. It sounds unfair, I know.

What is tax Form 982?

Form 982 is a tax form that attaches to your Form 1040 or business tax return. It has multiple conduits to exclude cancelled debt on Form 1099-C from taxable income.

“Don’t pay any tax on the 1099-C cancelled debt before exploiting all of Form 982. Insolvency is just one option of Form 982.”
– Gary Bode, Form 982 CPA

What is insolvency for IRS Form 982?

The amount of insolvency is a dollar figure calculated by subtracting what you owe (i.e. your liabilities) from the value of what you own (i.e your assets). So if you owe $150,000 and have $100,000 in assets, you’re insolvent by $50,000. But of course, the IRS doesn’t make it that easy!

How’s the insolvency used on Form 982?

You can exclude debt cancellation on Form 1099-C from taxable income to the extent that you are insolvent. So if tax Form 1099-C reports $60,000, and you’re insolvent by $50,000, you can exclude $50,000 of cancelled debt from taxable income. Tax on $10,000 is better than tax on $60,000, right?

Is insolvency the only option on Form 982?

No, insolvency is just the best know channel on Form 982. Sometimes debt cancellation CPAs use more than one option. But insolvency may be the only option available under some circumstances, like credit card debt cancellation for example. Form 982 can be applied in a wide variety of situations.

What’s the amount of tax I will pay on my debt cancellation if I don’t use Form 982?

Probably 25-30% of the cancelled debt reported on Form 1099-C; $100,000 of cancelled debt means $25,000-$30,000 of tax.

Can I prepare Form 982 myself?

It depends. Form 982 is complex and the IRS directions confuse some folks. There’s also the tax attributes section of Form 982 which gets little mention on the Internet. If you get uncomfortable with Form 982, give us a call. We don’t help you prepare Form 982 over the phone of course, but we can overview your situation and share some experience with you. (910) 399-2705.

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