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My wife received a 1099-C from Bank of America credit card

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in January of 2010 in...
My wife received a 1099-C from Bank of America credit card in January of 2010 in the amount of $12000. We have filed tax return last year (for 2009) as Married joint filing, and now because of this huge amount of 'canceled debt income' of $12000 we are due IRS a high amount of tax. At the time of canceled debt (notification from BoA that her credit card debt has been forgiven) she had about $500 in her own checking/saving account, and a $14000 FMV vehicle (that the title is under my name), about $300 worth of jewlery, and her own clothes and other household stuff such as furnitures (all bought under my credit or debit account), plus joint checking/saving account balance of $2700. My questions are: 1. Should we file tax return this year as "married separate" to clarify her debts only? 2. From above list of her assets, which one(s) can be excluded from her asset? 3. Let's say the debt forgiveness letter was received on 1/15/10, can she supply bank statements as of 12/30/09 as assets? Thank you in advance for your kind help!!
Submitted: 6 years ago.Category: Tax
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3/22/2011
Tax Professional: Wendy Reed, Enrolled Agent replied 6 years ago
Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3,346
Experience: 15+ years tax preparation and tax advice.
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Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.

 

Hello, have you considered using the insolvency exception for canceled debt? To do this you would need to use Form 982.

 

If, right before the debt is cancelled (the date the company cancels it, in this case 1/2010), a person has liabilities totaling more than assets, the person is insolvent up to the difference. In your example, If she owed $12000, but owned $500 cash, $300 jewelry, 1/2 your joint account (1350)--then her assets would be 2150. The car is owned by you and Colorado is not a community property state.

 

So she would be insolvent by $9850 and this is the amount that you could exclude from income, by filing form 982.

 

You can use this form (and her calculation of debts and assets) on a joint return if it yields a better botXXXXX XXXXXne.

 

Please let me know if you need additional information.

 

 

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Customer reply replied 6 years ago

Thank you Wendy,

 

I am in fact considering the insolvency exception, so that's why I asked which of, filing separate or joint would be more beneficial for us. I have few more questions..

 

1. what is "community property state"?

2. So, my personal assets and joint assets (other than joint checking/saving account) such as household stuff (kitchenware, beds, sofa, clothes, etc.) will not be counted toward assets when calculating asset/liability worksheet to prove insolvency?

3. If she has other credit card and student loan liabilities that adds up by $30,000, can she include this on her asset/liability worksheet?

 

Please advise your thoughts. Thank you!!!!

Tax Professional: Wendy Reed, Enrolled Agent replied 6 years ago

1. There are 9 community property states. These states have property laws that generally cause each spouse to take ownership of 50% of assets/income within a marriage. This does not apply to Colorado.

 

2. Your own personal assets do not have to be included in her calculation of assets and liabilities, but jointly owned property is generally considered owned 50/50%.

 

3. Yes, her other liabilities go on the worksheet, as long as she legally owed them on the date the other debt was cancelled.

 

It sounds like she will meet the insolvency exception for the entire amount of the $12000.

Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3,346
Experience: 15+ years tax preparation and tax advice.
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Customer reply replied 6 years ago

Great. I am getting closer to this....

 

Now, in terms of filling out the insolvency information...

 

1. Form 98: is line 1b all she need to check on this form? (and $12,000 on line 2)?

2. Asset/Liability Statement: Is there an official form or can I create my own?

3. What esle would you add (if this was your case) in terms of total assets other than:

Stock owned ($2000 value), $500 in checking/saving account, $300 value jewelry,

approx. $400 worth of her clothes, 1/2 of household stuff (should I include all

furnitures, electronics, and kitchen stuff?)

 

*You said because the car she drives is under my name only, that does not need

to be counted toward her asset, right?

 

I think this should be my last series of questions. Thank you!

 

 

Customer reply replied 6 years ago

Great. I am getting closer to this....

 

Now, in terms of filling out the insolvency information...

 

1. Form 98: is line 1b all she need to check on this form? (and $12,000 on line 2)?

2. Asset/Liability Statement: Is there an official form or can I create my own?

3. What esle would you add (if this was your case) in terms of total assets other than:

Stock owned ($2000 value), $500 in checking/saving account, $300 value jewelry,

approx. $400 worth of her clothes, 1/2 of household stuff (should I include all

furnitures, electronics, and kitchen stuff?)

 

*You said because the car she drives is under my name only, that does not need

to be counted toward her asset, right?

 

I think this should be my last series of questions. Thank you!

Tax Professional: Wendy Reed, Enrolled Agent replied 6 years ago

The instructions to follow for credit card debt:

 

"

Follow these instructions if you do not have any of the tax attributes listed in Part II (other than a basis in

nondepreciable property). Otherwise, follow the instructions for Any other debt below.

1. Check the box on line 1a if the discharge was made in a title 11 case (see Definitions on page 3) or the box on line

1b if the discharge occurred when you were insolvent (see Line 1b on page 3).

2. Include on line 2 the amount of discharged nonbusiness debt that is excluded from gross income. If you were

insolvent, do not include more than the excess of your liabilities over the fair market value of your assets.

3. Include on line 10a the smallest of (a) the basis of your nondepreciable property, (b) the amount of the

nonbusiness debt included on line 2, or (c) the excess of the aggregate bases of the property and the amount of

money you held immediately after the discharge over your aggregate liabilities immediately after the discharge."

There is a helpful Insolvency Worksheet of page 6 of the following Publication:

http://www.irs.gov/pub/irs-prior/p4681--2009.pdf

You do not file this worksheet, just keep for your records.

I can't tell you what else to add to asset list, I don't know what your wife owns! Any property that she has legal ownership interest in should be included--don't forget about retirement funds. The list of assets on the worksheet should help.

If she does not own the car that she drives, then that is not her asset. Your state is not a community property state, she does not have ownership in the vehicle. Form 982 on a joint return when the debt is for one person must be figured with that spouse's debt and assets. You don't combine joint assets and debts.

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