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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4471
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I am not clear how to do complete the insolvency worksheet.

Customer Question

I am not clear how to do complete the insolvency worksheet. It states the FMV, on the 401K, can you apply penalties that would be taken? If I have $40,000 in the 401K it would make me solvent, however, if I took it out I would not have that much and the penalties would make me partially insolvent.
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Hi from Just Answer. I'm PDtax, and will assist.

Customer: replied 1 year ago.
Do you need any additional information? This is for 1099c. Mortgage discharge
Expert:  PDtax replied 1 year ago.

Sorry, had to take a call.

Expert:  PDtax replied 1 year ago.

I would report the 401(k) balance at FMV, that is, realizable value after the 10% penalty and taxes due on the account if you were to liquidate it. A $40,000 401(k) might only be worth $26,000 once you pay the 10% penalty and fed/state taxes at 25%. Your rate may be different.

One thing I can add that most people forget is the amount of income taxes, Fed and state, due as of the date of debt relief. A tax due at that date should be counted against assets owned at that date. Most folks don't count that debt.

We have actually calculated a tax as of that date to support a debt inclusion for the worksheet.

This calculation is worth having a tax pro assist with your tax prep. They will have access to all your other figures and be able to advise. Take my suggestions to a pro and let them assist. 982 is not a form I would recommend anyone prepare themselves, and the worksheet has so little guidance that valuation issues and opportunities are things tax pros think about regularly.

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Answer. Please accept my response, rating my assistance, once you are satisfied. I'm PDtax.