tax insolvency without bankruptcy for cancelled debt?

Deal Score0

settled some credit cards in 2008. I understand ill be getting some 1099c’s in the mail that need to be reported. My mortage, equity and credit card balances deemed me insolvent at the time.
If i take my info to hr block or jackson hewit, is it going to be a problem that my mortgage and equity loans are in different names?
My original mortgage is in my maiden name. my equity is in my first married name, along with my bank statements and credit card statements.
I got married at the end of 2007, so my name is different now.

what all do i need to take to prove insolvency and will they be able to file electronically?

  1. Reply
    February 8, 2011 at 10:54 pm

    The names should not be a problem.

    You are insolvent if the value of your assets are less than your total liabilities.

    To qualify under the insolvency rules will require financial statements listing the value of your assets (home, vehicles, etc.) and your total liabilities. You really want someone with substantial experience handling this, definitely not a part-timer at one of the storefront tax prep mills. The year-round offices often have more highly experienced year-round staff and ideally you’d want a CPA or EA involved.

    You won’t be able to e-file this as the financial statements must be attached to your tax return. It will have to be mailed in.

  2. Reply
    February 8, 2011 at 10:56 pm

    There are five situations where a cancelled debt does not have to be reported as income:
    Bankruptcy – the debt was already discharged through a bankruptcy proceeding.
    Insolvency – your total debts exceed your total assets at the time your debt was settled or deemed noncollectable.
    Indebtedness is due to a qualified farm expense.
    Indebtedness is due to certain real property business losses.
    Discharge of your debt was treated as a gift (You owed Mom $ 10K and she said “Don’t worry honey, consider it a gift”).

    If you are insolvent and got a 1099C, you need to explain this to the IRS on your tax return. You can fill out IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness and attach a detailed letter to your tax return explaining the calculation of your total debts and assets. Your liability or lack thereof depends on your equity in assets.

    Failure to address this via the 982 may result in an IRS “under-reporter” assessment. They will tax you on the 1099C if you leave it off the return when all tax documents reported to them are matched against the data on your return.

    Here is the link to the IRS Form for dealing with non-bankruptcy insolvency and forgiven debt:

    I also recommend that you do not got to H&R or one of the other chain tax prep shops. Unless the preparer is licensed (CA & Oregon have licensing), is a CPA, Enrolled Agent or an Accredited Tax Preparer (ATP) or Accredited Tax Advisor (ATA); the guy or gal at one of those places might have only had a 3 day course in taxes.

  3. Reply
    v b
    February 8, 2011 at 11:10 pm

    You may not be able to file electronically…or if you do, you’ll attach the statements to a form 8453.

    The form 982 requires an attachment where you show how you determined you were insolvent, if you were insolvent for all or just some of the debt, and which assets you reduced.

    The name issue isn’t a problem.

    Before you sit down, ASK if anyone has experience with form 982 and read publication 4681. You don’t need to pay to be their test case.

    As for paperwork, take a very comprehensive list with you. Take two spreadsheets with you (handwritten is fine) and make them complete.

    Spreadsheet #1 (to prove insolvency):
    List Assets at current value. This includes clothes, furniture, jewelry and retirement accounts. Include the cash you used to settle the debt.
    List all debts, including the credit card debts in full.
    Show the totals.

    Spreadsheet #2 (for tax attribute reduction):
    List assets (but not the cash used to settle) and list what you originally paid for them.
    List remaining debts (but not the cancelled debt).

    If the assets are more than the debt, you must write down the assets using the instructions in the irs pub 4681. If the debts *still* exceed the asset value, you have met the debt reduction limit. If the cancelled debt is $ 5000 and the assets exceed the debts by only $ 3000, write down $ 3000.

    PS, the 1099-Cs are notorious for showing up several years later. The year you receive them is the year you do the 982.

  4. Reply
    February 8, 2011 at 11:37 pm

    It will not be a problem that your mortgage and equity loans are in your different names.

    You will need to prove insolvency at the time each debt was cancelled. You do this by listing your assets and liabilities at the time of each cancellation and including it along with Form 982. Your return will have to be mailed.

    You need to prepare your list of assets and liabilities at the time of each cancellation. If you do that, your return is simple to do and a commercial preparer should be able to do it for you.

    Leave a reply

    Register New Account
    Reset Password