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1099's and Insolvency

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I was reading on how to deal with 1099's on forgiven debt and insolvency. It looks like all that is required is to file attach form 982 provided the criteria for insolvency (publication 908) is met.

 

Am I reading this correctly? Is it that simple? Are there any hidden income restrictions that I am missing? Are retirement accounts excluded?

 

Publication 908

 

Exclusions

Do not include a canceled debt in gross income if any of the following situations apply:

  • The cancellation takes place in a bankruptcy case under the U.S. Bankruptcy Code. See Bankruptcy case exclusion, later.
  • The cancellation takes place when you are insolvent (see Insolvency exclusion, later), and the amount excluded is not more han the amount by which you are insolvent.
  • The canceled debt is qualified farm debt (debt incurred in operating a farm). See chapter 4 of Publication 225, Farmer’s Tax Guide.
  • The canceled debt is qualified real property business indebtedness (certain debt connected with business real property). See Publication 525, Taxable and Nontaxable Income.

Insolvency exclusion. You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.

 

Exclude from your gross income debt canceled when you are insolvent, but only up to the amount by which you are insolvent. However, you must use the amount excluded to reduce certain tax attributes, as explained later under Reduction of Tax Attributes.

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bump

 

 

If you go by that murky definition, 50% of all consumers meet that requirement. :lol:

 

 

The Pub 908 rule doesn't really need to apply if we're talking about the nature of the debt.

 

 

The amount in BOX 2 of the 1099 is what is important and that's what the IRS looks at for Line 21. If you change it to zero or you reduce it, you need to justify it some way. You justify that by filing on paper, and attaching the explanation in an attestation statement.

 

 

 

 

 

 

Here are some very easy ways to "Justify Off" a 1099:

 

 

THE DEBT IS CREDIT CARD ORIGINATED - First of all, the law requires you to pay INCOME tax. How much of BOX 2 is forgiven PRINCIPAL? Is this amount including accrued interest? Does this amount include fee income to the issuer? Easier still: Is this amount MORE than the original credit line you got from the lender?

 

 

This is important. You have to pay income tax on INCOME... not on fees tacked on to the principal of a balance that was forgiven. A canceled debt is the PRINCIPAL amount of debt that was forgiven.

 

 

Card card companies almost never issue 1099-C because it's too much of a headache to unwind your revolving account and actually seperate how much of what you owed was an extension of credit and how much of what you owe in the balance was compounded fees. It is the compounding of the balance which is why the credit card company cannot really issue you a 1099-C, and it's also why they won't be forgiving you the debt. Credit Card companies either DISCHARGE debt (i.e. Ms. Jones died and the capacity to collect this is impossible under any circumstance, they were sued and a court rules the debt is void, etc) or they ASSIGN the debt (they pay someone to twist your arm).

 

 

 

STRUCTURED LOANS are a completely different matter.

 

A structured loan product is a car loan, a mortgage, an installment agreement, an IOU which may or may not even have any interest on it----any debt that has a clear accounting separation of a principal account which gets paid down, and an interest account which you don't pay taxes on (the lender pays income taxes on the interest payments you make).

 

When a structured loan is forgiven... say in a short-sale foreclosure; if you default on the debt or the lender accellerated the note and you could not immediately pay this off and it goes to a short sale, the remainder of PRINCIPAL is what goes on 1099-C box 2. You may or may not be insolvent at the time of the default. Suppose you own an annuity which you can't really access without incurring tremendous potential capital losses---therefore you cannot realistically access it to absolve the debt. Are you insolvent in that case? No.

 

You owe income tax.

 

 

 

UTILITY PAYMENT debt falls into the category of "goods used but never paid for." If you purchased a cell phone contract where you agreed to pay X dollars a month and then you go late and default, owing 3 months worth of usage.... the amount of useage minus the fees, taxes, interest and surcharges is the amount of GOODS that you consumed without actually PAYING for the goods consumed.

 

In other words, it's like someone gave you money for free to use those services. When the debt is canceled, it's always going to be a collections agency or a junk debt buyer---and there goes the confusion between what that amount in Box 2 is really supposed to be reporting.

 

 

 

 

 

Keep in mind, most collections agencies don't bother to do a full investigation of the account they are trying to collect. All they have on their computer screens is contact-management info, skip tracing info, last copy of a credit pull and the amount assigned to be collected.

 

It stands to reason when 1099-C are batched out, there's a high probability that if the 1099's are originating from a run of the mill debt collector, BOX 2 is going to be wrong unless the collections agency did their due dilligence (unlikely) to discover what is the true amount of DEBT that was forgiven.

 

 

 

 

If I default on $10.00, and you the CA tell me I owe $1,000,000.00 but will happily accept $5.00, that does NOT mean you canceled a debt if $999,995.00

 

 

 

 

Got it?

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THE DEBT IS CREDIT CARD ORIGINATED - First of all, the law requires you to pay INCOME tax. How much of BOX 2 is forgiven PRINCIPAL? Is this amount including accrued interest? Does this amount include fee income to the issuer? Easier still: Is this amount MORE than the original credit line you got from the lender?

 

This is important. You have to pay income tax on INCOME... not on fees tacked on to the principal of a balance that was forgiven. A canceled debt is the PRINCIPAL amount of debt that was forgiven.

 

Card card companies almost never issue 1099-C because it's too much of a headache to unwind your revolving account and actually seperate how much of what you owed was an extension of credit and how much of what you owe in the balance was compounded fees. It is the compounding of the balance which is why the credit card company cannot really issue you a 1099-C, and it's also why they won't be forgiving you the debt. Credit Card companies either DISCHARGE debt (i.e. Ms. Jones died and the capacity to collect this is impossible under any circumstance, they were sued and a court rules the debt is void, etc) or they ASSIGN the debt (they pay someone to twist your arm).

 

AMEX had no problem putting a dollar amont in Box 2. I imagine BofA and Chase will be smart enough to figure it out as well. :good:

 

if your assets are less than your liabilities then you file form 982. its pretty simple. also if you were bk in 2008 then its pretty much automatic.

 

DW and I are going to file a form 982. We didn't file BK in '08 but with what we owe on the house, student loans, and two cars proving insolvency should be fairly straight forward.

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THE DEBT IS CREDIT CARD ORIGINATED - First of all, the law requires you to pay INCOME tax. How much of BOX 2 is forgiven PRINCIPAL? Is this amount including accrued interest? Does this amount include fee income to the issuer? Easier still: Is this amount MORE than the original credit line you got from the lender?

 

This is important. You have to pay income tax on INCOME... not on fees tacked on to the principal of a balance that was forgiven. A canceled debt is the PRINCIPAL amount of debt that was forgiven.

 

Card card companies almost never issue 1099-C because it's too much of a headache to unwind your revolving account and actually seperate how much of what you owed was an extension of credit and how much of what you owe in the balance was compounded fees. It is the compounding of the balance which is why the credit card company cannot really issue you a 1099-C, and it's also why they won't be forgiving you the debt. Credit Card companies either DISCHARGE debt (i.e. Ms. Jones died and the capacity to collect this is impossible under any circumstance, they were sued and a court rules the debt is void, etc) or they ASSIGN the debt (they pay someone to twist your arm).

 

AMEX had no problem putting a dollar amont in Box 2. I imagine BofA and Chase will be smart enough to figure it out as well. :D

 

if your assets are less than your liabilities then you file form 982. its pretty simple. also if you were bk in 2008 then its pretty much automatic.

 

DW and I are going to file a form 982. We didn't file BK in '08 but with what we owe on the house, student loans, and two cars proving insolvency should be fairly straight forward.

 

 

if it exceeds your assets then it is straight forward.

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Canes,

 

I believe you. And thanks.

 

Having never gone through this before I worry over the details.

 

This years 1099's aren't too bad. Only $11K. Next year, our 1099's could be as much as $60K depending on how the remaining settlement negotiations go this year. Being able to claim insolvency is going to really help with these. The taxes on that much forgiven debt would be brutal.

 

I plan on roughing in the numbers using Turbo Tax this weekend.

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Canes,

 

I believe you. And thanks.

 

Having never gone through this before I worry over the details.

 

This years 1099's aren't too bad. Only $11K. Next year, our 1099's could be as much as $60K depending on how the remaining settlement negotiations go this year. Being able to claim insolvency is going to really help with these. The taxes on that much forgiven debt would be brutal.

 

I plan on roughing in the numbers using Turbo Tax this weekend.

 

 

good luck to you .. just make sure your paperwork is correct

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I haven't looked at these rules in a while. But, I do remember that Congress liberalized the rules (to the taxpayer's benefit) last year.

 

I think the publication you want to be using is Publication 4681 - "Cancelled Debts, foreclosures, repossessions and abandonments".

Check the date on your publication 908 - I think it may be seriously out-of-date.

 

You might find this IRS link helpful:

 

IRS page on cancelled mortgate debt

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I haven't looked at these rules in a while. But, I do remember that Congress liberalized the rules (to the taxpayer's benefit) last year.

 

I think the publication you want to be using is Publication 4681 - "Cancelled Debts, foreclosures, repossessions and abandonments".

Check the date on your publication 908 - I think it may be seriously out-of-date.

 

You might find this IRS link helpful:

 

IRS page on cancelled mortgate debt

 

In terms of inslovency the two publications are the same. But yes, 4681 is the newer of the two. Now, I all need to understand Tax Attributes and how it may or may not impact our filing. I am hoping that Turbo Tax can walk me through it.

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I think I got it right at least as long as line 2 and 10a on form 982 are supposed to be the same. I am also going to attach the work sheet that shows how I calculated being insolvent. This is actually one of the few times that having over $100K in student loans is coming in handy.

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>I am also going to attach the work sheet that shows how I calculated being insolvent.

 

Can you please explain how you filled out the worksheet? I was able to go to the form view in Turbo Tax and add a form for 1099c. It gave me a canceled debt worksheet and canceled debt summary. I also added form 982 - but it's confusing.

 

Did you get your federal tax due amount to reduce accordingly?

 

thanks!

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>I am also going to attach the work sheet that shows how I calculated being insolvent.

 

Can you please explain how you filled out the worksheet? I was able to go to the form view in Turbo Tax and add a form for 1099c. It gave me a canceled debt worksheet and canceled debt summary. I also added form 982 - but it's confusing.

 

Did you get your federal tax due amount to reduce accordingly?

 

thanks!

 

It took me a few hours to work through the forms and the work sheet. Mostly because Turbo Tax does not provide interview questions. But yes, after I got the forms to work properly, the 1099-c's were excluded from my income.

Edited by EarnIt

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>I am also going to attach the work sheet that shows how I calculated being insolvent.

 

Can you please explain how you filled out the worksheet? I was able to go to the form view in Turbo Tax and add a form for 1099c. It gave me a canceled debt worksheet and canceled debt summary. I also added form 982 - but it's confusing.

 

Did you get your federal tax due amount to reduce accordingly?

 

thanks!

 

It took me a few hours to work through the forms and the work sheet. Mostly because Turbo Tax does not provide interview questions. But yes, after I got the forms to work properly, the 1099-c's were excluded from my income.

 

 

 

congrats glad those salamanders just wasted their time sending you that crap

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>I am also going to attach the work sheet that shows how I calculated being insolvent.

 

Can you please explain how you filled out the worksheet? I was able to go to the form view in Turbo Tax and add a form for 1099c. It gave me a canceled debt worksheet and canceled debt summary. I also added form 982 - but it's confusing.

 

Did you get your federal tax due amount to reduce accordingly?

 

thanks!

 

It took me a few hours to work through the forms and the work sheet. Mostly because Turbo Tax does not provide interview questions. But yes, after I got the forms to work properly, the 1099-c's were excluded from my income.

 

 

 

congrats glad those salamanders just wasted their time sending you that crap

 

So am I. This year and next year would have been brutal had I been forced to pay taxes on the debt that has been settled so far.

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>I am also going to attach the work sheet that shows how I calculated being insolvent.

 

Can you please explain how you filled out the worksheet? I was able to go to the form view in Turbo Tax and add a form for 1099c. It gave me a canceled debt worksheet and canceled debt summary. I also added form 982 - but it's confusing.

 

Did you get your federal tax due amount to reduce accordingly?

 

thanks!

I am looking at my forms list right now.

 

I see:

Form 1099-C Cancellation of Debt

Canceled Debt Worksheet

Canceled Debt Worksheet - statement of insolvency

Canceled Debt Sumary

Form 982 Reduction of Tax Attributes

 

For From 982 I set line 10a equal to line 2.

 

Do you have all of these forms?

Edited by EarnIt

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I have a 1099-C that I'm going to have excluded for the above reason as well.

My question is, can you accomplish filing these out and the associated summary forms with Turbo Tax online? That's the only TT product I have and was wondering if it was possible. Specifically which TT online (Deluxe, Premier, etc).

 

By the way to make sure I understood how to properly fill out Form 982 and it's effects on future filings, I called the IRS' 800-something-1040 number. SURPRISINGLY very succinct and precise help from the representative. I was very impressed.

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I have a 1099-C that I'm going to have excluded for the above reason as well.

My question is, can you accomplish filing these out and the associated summary forms with Turbo Tax online? That's the only TT product I have and was wondering if it was possible. Specifically which TT online (Deluxe, Premier, etc).

 

By the way to make sure I understood how to properly fill out Form 982 and it's effects on future filings, I called the IRS' 800-something-1040 number. SURPRISINGLY very succinct and precise help from the representative. I was very impressed.

 

Form 982 is in both Deluxe and Premier. I am not sure about the online versions. I purchased TT at Best Buy. Unfortunately, 1099-c and form 982 are not fully supported by the "interview" you have to force these forms to turn on.

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This is very interesting. I looked at the worksheet provided by the IRS.

 

Can someone explain this to me or give an example. The worksheet was asking for total liabilites before cancellations and then total assests.

 

So do you want your liabilities to be more than your assests to be insolvent and not have to pay taxes on your 'forgiven' debt? Am I reading it correctly?

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Short answer: Yes.

 

If liabilities > assets, then you are insolvent.

 

If the amount is substantial, I would recommend getting advice from a tax professional just to be sure.

 

Good luck!

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Thanks!

 

So is your home considered a liability or asset? It still carries a mortgage.

Your home is an asset. The mortgage is a liability.

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I Settled on a 2nd Mtg (Home Equity Loan) for 10 cents on the dollar.

 

HFC sent me a 1099 for $71,865. From what I gather you have to prove Insolvency BUT you must be "upseide down" for the amount of the Forgiven debt (in my case $71,865) in oerder to have the entire $71,865 forgiven.

 

I took this from a website:

 

However, if you can demonstrate that you qualify for an exclusion or exception, you may be able to avoid paying taxes on part or all of that phantom income. One of the most commonly used exclusions is the “insolvency exclusion.” It works like this: you are insolvent to the extent that your liabilities (what you owe) exceed your assets (what you own). If the total amount by which you are insolvent is larger than the amount listed on the 1099-C, you can exclude the entire amount listed on the 1099-C from your income. You’ll have to file Form 982 with your tax return to claim this exclusion. If you the amount by which you are insolvent is less than the amount on the 1099-C then you may be able to avoid including part of that amount in your income.

Can anyone shed some light on this?

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