Debt Settlement and Taxes

That is a very complicated question. In order to establish insolvency you must assess your asset/liabilities at time of settlement. If your liabilities exceeded your assets you are insolvent. However, you are only insolvent to the amount your liabilities exceed your assets. Otherwise, if you have $100,000 in assets and your liabilities are $130,000, you are only insolvent by $30,000.00. I have spent hours on the phone with the IRS trying to determine how they put together if you are insolvent or not. The last lady I spoke with says that you must use "fair market value" of your home and vehicles. On your home, fair market value ultimately will be determined by the IRS if they audit you. When you are deciding how much your home value is you can use a professionally prepared appraisal, a realtor market analysis, if you were just professionally assessed, you could use your town assessment. Regarding vehicles, you could get an estimate from Kelly Blue Book on line, print out your value and put it in a folder. You should put all you evidence in a folder in case you get audited, this includes bank statements, retirement statements and etc., all at point of settlement. They will also want to know how much your furniture and fixtures are worth, do you have any jewelry i.e. wedding ring, lawn mower, tools, boat, snowmobile and etc. All assets need to be included.

After you have determined you are insolvent, you fill out form 982 and include the 1099C with your tax records you send to the IRS.

It sounds like you will only have trouble with your claim of insolvency if you get audited. Many agencies including creditors have the ability to get a value of your real estate just by putting your address in a search engine and it gives a value of your neighborhood. I've read this is how creditors determine if you might have equity and they could sue and put a lien against your home if you do not pay. I'm assuming the IRS would have the same ability so to insure you are not audited, use a reasonable value of your real estate if you own any to avoid an audit.

I'll make it even easier. I have no estate. I also am in the process of paying off a vehicle. I have 0 assets. I own nothing. I only have a checking account. No savings. I am literally broke and working to fix that.

You must make sure you can define asset properly. You have an asset, you have a car, do you have furniture, jewelry, clothing? So lets say you have a car, the car is worth $5,000 and you still owe $2,000 - that is equity of $3,000 and it is an asset. Then lets say your personal possessions including furniture, fixtures and clothing come to $2000 (auction value), you have assets of $5000. Now let's say at time of settlement you owed $10,000 to your credit card and $2,000 to your car, so your liabilities are $12,000, so you are only insolvent to the tune of $7,000 - so if your 1099c exceeds $7,000 you have to pay tax on anything over that.

Ok. I am finally not guest3258 anymore. Basically, I have approximately $51k in debt (student loans, car, 2 ccc's that have yet to settle). My assets total roughly $5k (that includes furniture, cars, and clothes). My 1099c is for $5.5k. So, what I need to know is:

1. Do I include the 1099c as income or do I not include it as income and just submit the 1099c and the 982 to show insolvency?

2. Do I need to include a print out of assets/liabilities? On form 982 is says to include this for corporations (or am I reading it wrong).

Thanks again for all your help!!

In my conversation with the IRS, they just require a copy of the 1099c and the form 982 if it is for an individual personal return. However, you should print out your asset and liability position and put it with your tax records in the event of a future audit. From the information you have provided, you are insolvent and should not have to pay tax on the income.

Forgive me for sounding completely dumb, but is there a special asset/liability form that I need to fill out? I have no idea because I have never had to do this before. Thanks again!

What do they consider assets? The person doing my taxes said I needed to inventory everything I owned and list the fair market value. Is a pension or retirement fund considered an asset? Is there any verfication of assets?

A retirement plan that could be liquidated is considered an asset - 401K is an asset. When you are adding up assets:

Assets:

Cash on hand
Checking & Savings in account
Retirement funds available
Investments value
House value
Car value
Personal Property value
Jewelry value
Boats value
Snowmachines and etc. value

Liabilities:

credit card debt
Car loan
boat loan
home loan
personal loan and etc.

If you were audited they would ask for your bank statements, retirement statements and how you determined the value of your home, car and personal possessions. If you are not audited, it is never verified.

A pension typically doesn't have a cash value - but a 401k loan does have a cash value.

I didn't have a whole lot of assets, so I simply sent in the 982 form along with a listing of my assets and liabilities. I did not have any problems.

Here is my dilemma, I had $165K credit card debt, $15K loan from credit union, $15K loan from retirement fund (govt. employee TSP), $12K remaining on car loan and $252K on mortgage. I was able to get another TSP loan for $50K and paid off most of the CC debt, had $80K forgiven. Now its tax time and I am looking at a $22K federal and $6K state tax bill. Obviously I cannot afford this as I still owe about $6K on CC's, $5K car, $240k mortgage, $40K TSP, and $10K TSP.
Any idea if the federal employee thrift savings plan (TSP), I can not touch it until 59 1/2, otherwise I am penalized. Approximately $80K in the fund. My wife has $100K in hers and the $10K is against her TSP.
Any clue if I would be considered insolvent?

The borrowed portion of your retirement plan is a liablity - if you have a loan against it - You look at your financial position at the time of settlement; not after settlement. So all the credit card debt you had is counted as a liability as well - does that help?

Is the remaining $70K I have invested and the $100K my wife has invested considered an asset?

how important is it to include measly amounts in checking and personal property on the 982? i rent my apartment, have no car, and aside from some books, clothes, computer, and a bed, no real personal property. is it truly essential to estimate a fair market value on these things, in addition to maybe $200 in my bank account at the time my debt was canceled?

the debt canceled on my 1099c adds up to 100k. in addition to that i still have around 25k in debt that i am currently paying off.

is the IRS going to quibble with me over 2 or 3k in assets, if i was insolvent to the tune of 125k at the time of debt cancellation?

you said retirement accounts - what about an account with the state that I was not able to access until the year was over? hence it was an asset but I could not access it to pay the debt?

second, if filing jointly, do I include my and my wife's assets and liabilities combined? thanks a lot for your help!

I took my Assets(cars, jewelry, furniture) and subtracted my Liabilities(Home loan vs. Market value) and came up with negative $26K in the hole. My forgiven amount from the credit card company, which would be the 1099C is $70K. Am I insolvent???

Hi, I have no house and no car and about $1,000 in cash from my Checking account, I also had a $8,000 credit card debt which I payed $5k, and the rest was forgiven so $3k was forgiven, and on top of that I just received an IRS statement saying I owe $10,000 from purchasing a $200k real estate property about 2 years ago.