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I settled some credit card debts this year and was wondering

Customer Question
if I could use form...
I settled some credit card debts this year and was wondering if I could use form 982 to exclude this from my income, how do I prove insolvent, I dont quite understand
Submitted: 7 years ago.Category: Tax
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1/2/2010
Tax Professional: Merlo, Accountant replied 7 years ago
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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Hello biged,

 

When you have debt that is cancelled or forgiven, that must be included in your taxable income. However, you can use Form 982 to claim an exclusion from paying tax on that forgiven debt if you either filed bankruptcy on the debts or if you can show that you were insolvent at the time this occurred.

 

Being insolvent means that your liabilities are more than your assets. You would attach a statement to Form 982 which would be a listing of all the assets and liabilities that you had at the time this happened. Here is a simplified example of such a statement:

 

Assets:

Home: $100,000 (current market value)

Car: $5,000 (current market value)

Cash in Bank: $1,000

Total Assets: $106,000

 

Liabilities:

Balance owed on home mortgage: $90,000

Balance owed on car loan: $3,000

Balances owed on credit cards: $20,000

Total Liabilities: $113,000

 

Using the above example, your liabilities exceed your assets by $7,000. So this is how much you could exclude of your forgiven debt from taxable income.

 

 

Thank you biged

 

 

 

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Customer reply replied 7 years ago
Do I include the forgiven debt amount when filling out 1040 in the taxable income or do
I just fill out the form 982 and attach it to the return.
Tax Professional: Merlo, Accountant replied 7 years ago

Hello again biged,

 

Whatever amount of the forgiven amount that you can exclude due to insolvency is not entered at all on Form 1040. You simply fill out Form 982 and attach your insolvency worksheet. If it ends up that you can exclude the entire amount of the forgiven debt, then you have no entries to make on the Form 1040. If you can only exclude part of the cancelled debt, then on Form 1040 you only include the amount which you cannot exclude.

 

 

Thank you biged

 

 

Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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