Question about insolvency

[LindaB]

On a MFJ return, the wife has a 1099-C for canceled credit card debt, it is only in her name. When figuring insolvency, would I only look at her assets and liabilities, or husband and wife combined? I couldn't find an answer to this in pub. 4681.

[kcjenkins]

If the debt is only in her name, he never was on the card, at all, ever, then it's based on her solvancy. However, if in a community property state, that is irrelevant.

[LindaB]

Thanks, KC. Not a community property state. The mortgage is in both their names so I guess I will give her half of the debt and half the FMV. Has anyone used the Insolvency Worksheet from pub. 4681? I can understand listing as assets cash and bank accounts, stocks and bonds, real estate, cars, etc. But it seems a little daunting to have to list the FMV of all your household goods and furnishings, tools, jewelry, clothing, books,...and other assets not included above.

[Tax Prep by Deb]

To determine insolvency all assets have to be taken into consideration. Basically what they are asking you to look at is if you could liquidate ALL assets how much money could you receive? Now look at everything owed at that point and that gives you the picture of whether they were insolvent or not.

Keep in mind it is FMV not what they paid for the things. Vehicles go down in value very quickly as do furniture and appliances. They want to know the amount if you sold it just prior to the date of the forgiven debt.

I agree, it is difficult to get some of the figures, but depending on how much effort your client (yes, your client) puts into it will determine how much they will have to include as cod income. (I give my client the worksheet, give them the worst case scenerio, and then send them on their way to do their homework). We cannot be expected to go and inventory their homes, banks accounts, investment accounts, ect.... Put some of the work on your client.

When I show them how much they will owe if they do nothing, compared to what I think their situation would be if they did their part, my clients leave and come back with the figures I need.

Hope this helps a little!

Deb!

[kcjenkins]

And you are looking at Thrift Shop value for the personal assets like books, clothing, etc. Which is pretty low.

[LindaB]

Thanks KC and Deb. I have sent her the worksheet and instructions how to fill it out. It's a case where I know what to do, but because of the people and their cricumstances, I didn't want to do it.