I kow there are other posts here covering this topic, but I wanted to share what I have recently learned.
Some facts we all probably know: The cancelled debt due to a settlement will be reported to the IRS and will be considered as income for you. However, if you are considered to be insolvent (more debt that assets) at the time of settlement, the amount can be reduced or even eliminated. For example, if you determine you are insolvent by $20000, you can have up $20000 of cancelled debt and not have to report it. Anything above $20000 you will have to report as income.
As far as reporting this on your taxes, this is what I have learned over past few weeks while communicating with a tax attorney: (1) You have to complete a worksheet showing assets verses liabilities for every debt you settled throughout the year. These values should be based on what they are at the time each debt was settled. (what is your home valued at, your mortgage balance, etc on the date of settlement). (2) Based on these sheets, you will how much of your cancelled debt has to be reported as income. (3) Take this amount and subtract it from your total cancelled debt and write this amount on line 2 of tax form 982. This tells the IRS how much you are excleding from your income. You also need to check line 1b on 982. (3) The amount you are reporting has to be enter on line 21 on form 1040 and labeled as cancelled debt.
When filing manually, your worksheets have to be attached to your return. If you are using TurboTax and filing electronically, you will choose the standard electronic filing method; this requires you to send in FORM 8453 to the IRS. TurrboTax will generate this form; print it out. Attach a letter of explanation, a copy of the 982 form, and your worksheets and mail it to the IRS.
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Asked on 9:32 am Mar 12th 2010
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Excellent information, da Ziegler. I'm sure all our members would find it useful. http://www.debtconsolidationcare.com/forums/member.php?u=146146
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Answered on 11:01 pm Mar 14th 2010
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