Janitor Bob Posted January 9, 2008 Report Posted January 9, 2008 I am still somewhat confused on this insolvency issue. When my wife passed away in March of 2007 my assets (including life insurance proceeds) were much less than my total debt (due to her huge medical bills). I negotiated with several collection agencies to take partial payment and forgive the rest. I had no retirement plan monies left, , no savings, did not own a home or a car.....So assets were way less than debt....can I personally avoid paying income tax on this forgiven debt because I was insolvent? If so, is there a particular form that needs filled out or do I just ignore the 1099s that I am sure I will soon receive? I simply have had no experience in this area with any clients, so not sure what to do. Quote
KEYWEST_RICKS Posted January 9, 2008 Report Posted January 9, 2008 Janitor Bob, My sympathy goes out to you. I believe you must be insolvent before and after the discharge. Additionally, I believe that a Form 982 is filed with the return. Good Luck jeff Quote
kcjenkins Posted January 9, 2008 Report Posted January 9, 2008 If you were insolvent both before and after, it will all be nontaxable. If the forgiveness made you solvent, then some might be taxable. But usually in a case like yours, you will be insolvent even after the 'adjustments', and still making some payments. If so, just use the 982, mark box 1(b ) and fill out the explanation section for Part II. There is a tab at the bottom to do this. Quote
Janitor Bob Posted January 9, 2008 Author Report Posted January 9, 2008 If you were insolvent both before and after, it will all be nontaxable. If the forgiveness made you solvent, then some might be taxable. But usually in a case like yours, you will be insolvent even after the 'adjustments', and still making some payments. If so, just use the 982, mark box 1(b ) and fill out the explanation section for Part II. There is a tab at the bottom to do this. Thanks KC...I was still insolvent after for many months...Just now...with saving and retirement plan...becoming solvent. Quote
Janitor Bob Posted January 9, 2008 Author Report Posted January 9, 2008 Thanks KC...I was still insolvent after for many months...Just now...with saving and retirement plan...becoming solvent. KC...This form 982 is new to me.....All of the debt forgiven in this case is consumer debt (credit cards, medical bills and hospital bills, etc) and I had no actual assets or property....It appears that I would not fill out anything in parts II or III...Just list the total debt forgiven on Line 2...Correct? In this case, would I simply ignore the 1099s received, or enter them and then enter an adjustment on the 1040 somewhere to remove the amounts from gross income? ...Or do I enter them on a 1099 Misc and just NOT have the amounts carried to the 1040? Quote
kcjenkins Posted January 10, 2008 Report Posted January 10, 2008 You would enter them on Line 21, down near the bottom where it says Canceled debts. It is the last preprinted item. Then in the blus line below, enter the same amount as a negative, and in the description area type in See Form 982. I would also, on the 982, put the same amount you put in Line 2 on Line 12. Quote
Janitor Bob Posted January 10, 2008 Author Report Posted January 10, 2008 You would enter them on Line 21, down near the bottom where it says Canceled debts. It is the last preprinted item. Then in the blus line below, enter the same amount as a negative, and in the description area type in See Form 982. I would also, on the 982, put the same amount you put in Line 2 on Line 12. Thanks, KC....but why put anything on 982 line 12? Quote
kcjenkins Posted January 10, 2008 Report Posted January 10, 2008 I'm not sure you have to, but it does cover your bases, since you are simply recognizing that IF you had had any carryovers, you would have reduced them! It's a no-cost CYA, that's all. Quote
Janitor Bob Posted January 10, 2008 Author Report Posted January 10, 2008 I'm not sure you have to, but it does cover your bases, since you are simply recognizing that IF you had had any carryovers, you would have reduced them! It's a no-cost CYA, that's all. Thanks...I really appreciate both your knowledge and you willingness to share it....I am a much better tax preparer due, in part, to wisdom from yourself and others on this board. Quote
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.