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Cancelled Debt CPA discusses the IRS insolvency worksheet

IRS insolvency work sheet, insolvency, cancelled debt, Form 982 instructions. Form 1099-C instructions

Sadly cancelled debt and Form 1099-C are still with us in 2018. Some defenses remain on Form 982. Need a free consult? Call (910) 399-2705.

Cancelled debt CPAs now often rely on personal insolvency on Form 982 to limit the amount of taxable income from Box 2 of Form 1099-C.  Why? The discharge of qualified principal residence indebtedness is essentially gone. It still appears on the 2018 Form 982. There is a loophole if the circumstances are correct. I’ll talk about that below despite the topic of this post.

The IRS insolvency worksheet

The insolvency worksheet has two pages. In a nutshell you list all the debt you have as of the date on the Form 1099-C. That includes the 2017 1099-C by the way.

Then you present the fair market value (FMV) of everything you own, including the shirt on your back. Literally.

If your debt is more than the FMV of your assets you have some insolvency:

  • If your insolvency from the IRS insolvency worksheet is more than the amount in Box 2 of Form 1099-C, you are completely insolvent and the cancelled debt flows to form 982 and becomes non-taxable.
  • If your insolvency is zero or less, all the cancelled debt flows to Line 21 on Form 1040 and is taxable income. Form 982 is useless for you.
  • If you are partially insolvent the amount of the insolvency flows to Form 982 and becomes non-taxable cancelled debt. The remainder of the canceled debt flows to Form 1040 and becomes taxable income.

You can use the IRS insolvency worksheet to defend against the following types of cancelled debt

  • Credit card cancelled debt.
  • Student loan cancelled debt.
  • Home mortgage cancelled debt. Again read below for a loophole.
  • For property cancelled debt like say land, a car repo, etc.
  • As the first defence for rental property foreclosures, home or rental property short sales, etc.

Rental property cancelled debt

You begin with the IRS insolvency worksheet. If you’re partially insolvent or completely solvent, you can use the discharge of qualified real property business indebtedness exclusion of Form 982 next.

A rental property 1099-C usually has other tax reporting obligations as well. Like the gain or loss on the “sale” of the property.

Another issue is the final Schedule E. Issues here are the amount of rental property depreciation over the years and looking at Form 8582 to check for prior disallowed losses, that you can now use, on the final Schedule E.

Tips about preparing the IRS insolvency worksheet

For debt you should have documents to prove anything if you’re audited. These documents might be credit card statements, documents showing student loan debt, etc.

If you’re leasing an apartment, you can use the unpaid rent still expected as a debt.  So let’s say you signed a one year lease for an apartment on January 1st, 2017, for $1000/month. Now assume your 1099-C is dated February 28th, 2017. The unpaid rent, $1,000 x 10 months, $10,000, is a debt on the IRS insolvency worksheet.

The asset page of the insolvency worksheet uses a lot of estimates. I find most clients over value the sales price of their possessions. One exception to estimates is vehicles. Use Kelly Blue Book values. Remember the balance of your car loan is a debt.

If you own a business, the insolvency becomes more difficult and the business debts and business assets need to presented on the insolvency worksheet.

The interest in pension plans means you list what you pull out of the account, as per the date on the 1099-C. Sometimes that’s nothing. Sometimes it’s the entire amount. It could less the full amount. Call your pension plan administrator to ask what your pension plan figure(s) are.

The discharge of qualified principal residence indebtedness loophole

If you short sold your primary residence in 2017 but have a bank agreement for 2016 you may be able to still use this exclusion on Form 982.

Cautions about the IRS insolvency worksheet

It uses some numbers you need documentation for. Use that number. Here a round number looks like a guess.

But most of the personal possessions are estimates. Use round number for estimates.

I offer a free phone consult, but at peak times during the tax season I can’t offer that. We are accepting new clients. Call (910) 399-2705.

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