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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Re: debt cancelation income - credit card Preparing 2011

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Re: debt cancelation income - credit card

Preparing 2011 tax return w/ turbo tax. Settled credit card debt for lower than balance. debt cancelation income: $1,523.

If I don't have this my return goes up $35 appx. Nothing big at all but I'd like to get that $35 put use knowledge gain to help in future. My mother had very low income last year...appx $16,000. She had one dependent and will get a refund (paid taxes plus EIC) of about $2,700.

So considering her very low income and age 65 I'm assuming so way to avoid this debt cancelation income. Turbo tax says if you think you qualify for an exemption to contact tax professional. The program doesn't give options to click exemption but I'm sure I can open up individual forms in turbo tax and hard type info that will update the entire return.

Comments to avoid debt cancelation of income?

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

Unless you were insolvent (liabilities exceeded assets) just before the debt cancellation, you aren't going to qualify for any exclusion. You'll need to report the income.

Stephen E. Grizey :

I'm sure that's not what you wanted to hear, but unfortunately that is the situation.

Stephen E. Grizey :

Please remember to rate my response in order that I can receive credit for my work; I'll be pleased to answer any follow-up questions you may have either before or after you rate my response.

Stephen E. Grizey :

Questions?

Stephen E. Grizey :

The following link is to the Form (982) that you would file to claim the exclusion, if you did qualify.

Stephen E. Grizey :

http://www.irs.gov/pub/irs-pdf/f982.pdf

Stephen E. Grizey :

If you look at Part 1 of the form, you will see the circumstances that would qualify for the forgiveness;

Stephen E. Grizey :

As you can see, the only possible exclusion for you and your credit card cancellation income would be insolvency.

Customer:

and claiming insolvency when she is going to get a refund of appx $2,700 wouldn't make any sense I'm assuming. unless of course she has lots of debt w/ no assets to pay them with. For example, if she has $20K in credit debt but only liquid asset would be the $2,700 then she might qualify?


 

Customer:

She thankfully doesn't have other credit card debt (at least that isn't collectable at this point) so insolvency I guess won't work. BUT in the future all I have to remember is I can claim this exception IF taxpayer is insolvent (Liab > assets)?


 

Stephen E. Grizey :

Who received the debt forgiveness income?

Customer:

my mom


 

Stephen E. Grizey :

Does she own a home?

Customer:

no - rent apt


 

Stephen E. Grizey :

In the beginning of your question, why are you referring to your return ie. the $35,?

Customer:

mistake. it's her return

Stephen E. Grizey :

OK

Stephen E. Grizey :

Insolvency means all of her assets; cash, jewelry, personal property, car, etc.

Stephen E. Grizey :

Are you typing? Chat has been acting up lately?

Customer:

hi


 

Customer:

ok: so insolvency means all assets - cash/jewelry/etc MORE than all liabilities?


 

Stephen E. Grizey :

yes, assets more than liabilities means you are solvent;

Customer:

ok - well she recently was given a small amount of land,not worth much but would knock her out of being insolvent.


 

Customer:

okay you answered my question


 

Stephen E. Grizey :

& wouldn't qualify for the exclusion

Stephen E. Grizey :

great

Customer:

I know what would qualify in future too.


 

Stephen E. Grizey :

Please remember the rating

Customer:

ok thanks.


 

Stephen E. Grizey :

Only if the law is extended

Stephen E. Grizey :

Right now it is good through 2012 only

Customer:
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