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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16576
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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The issue is whether or not to file federal taxes jointly or

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The issue is whether or not to file federal taxes jointly or separately. My wife has cancelled debt of $160,000. She can show insolvency if we file separately, but If we file jointly and I must include my 401K assets on the insolvency worksheet she cannot show insolvency. If we file jointly, must we show joint insolvency? Can we show only her assets and liabilities on the worksheet?

We will lose tax credits if we must file separately.
Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

According to PLR(NNN) NNN-NNNN--- "the determination of a taxpayer's entitlement to the insolvency exclusion under section 108(a)(1)(B) is based on all the assets reachable by the individual taxpayer's creditors. The filing of a joint return, pursuant to section 6013(b) of the Code, does not affect whether a spouse's separate assets will be used to determine the insolvency of the taxpayer."

So, she can still file the 982 by herself with her own assets, so if she is personally insolvent she would be able to exclude the cancellation of debt income from her income. However, her interest in joint assets would be counted as her assets, as would her interest in joint liabilities.

No need to file a separate return.

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You should be aware that your question, as with most tax questions, can never really be answered completely...addressing all the permutations; that is because of the many assumptions that have to be made I have done my best to determine what I think you are asking and answering it in the most direct and understandable manner possible. If, however, after reviewing the questions, you have any uncertainties or further questions, please do not hesitate to ask.

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Thank you for the positive rating. Please come back and see me next time you have a question. It was a pleasure working with you today. Have a great afternoon.
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