Cancellation of Debt Insolvency Worksheet
If you owe a debt to someone and they cancel or forgive that debt, the canceled amount may be taxable. However, if you were insolvent at the time the debt was canceled, you may be able to exclude some or all of the canceled debt from your taxable income by completing the Cancellation of Debt Insolvency Worksheet.
What is insolvency?
Insolvency is when your total debts exceed the fair market value of your total assets. For example, if you owe $100,000 in debt but your total assets are only worth $80,000, you are insolvent by $20,000.
Canceled debt and taxes
Canceled debt is generally considered taxable income by the IRS. For example, if you owed $10,000 on a credit card and the credit card company canceled the debt, you would normally have to report the canceled $10,000 as income on your tax return.
However, if you were insolvent at the time the debt was canceled, you may be able to exclude some or all of the canceled debt from your taxable income by completing the Cancellation of Debt Insolvency Worksheet.
How to complete the Cancellation of Debt Insolvency Worksheet
The Cancellation of Debt Insolvency Worksheet is used to determine how much of your canceled debt is excluded from your taxable income. To complete the worksheet, follow these steps:
- Calculate your liabilities
List all of your liabilities (debts) on the worksheet. Include all debts, even if they were not canceled. Examples of liabilities include credit card debt, car loans, and mortgages.
- Calculate your assets
List all of your assets on the worksheet. Include all assets, even if they are not liquid. Examples of assets include cash, investments, and real estate.
- Determine your insolvency
Subtract your total liabilities from your total assets. If the result is a negative number, you were insolvent at the time the debt was canceled.
- Calculate the excluded amount
Multiply the canceled debt by the insolvency ratio. The insolvency ratio is the amount of your insolvency divided by the total amount of your liabilities immediately before the cancellation of debt.
For example, if you were insolvent by $20,000 and your total liabilities before the cancellation of debt were $100,000, your insolvency ratio would be 20% ($20,000 / $100,000). If the debt canceled was $10,000, you would be able to exclude $2,000 from your taxable income ($10,000 x 20%).
- Report the excluded amount
Report the excluded amount on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach the Cancellation of Debt Insolvency Worksheet to your tax return.
Conclusion
The Cancellation of Debt Insolvency Worksheet is an important tool for anyone who has had debt canceled or forgiven. If you were insolvent at the time the debt was canceled, you may be able to exclude some or all of the canceled debt from your taxable income. Follow the steps outlined in this article to complete the worksheet and determine how much of your canceled debt is excluded from your taxable income.
✅Free Debt Relief Consultation. See If You Qualify In 1 Minute.
Click Here 👉 https://bit.ly/3GeFeHR
✅More Loan and debt relief articles 👉 Loan & debt
