Insolvency Worksheet: How to Make Debts Tax Exempt
IRS Insolvency Worksheet
Sometimes you just can’t get your debt under control. If your business has a bad year or you have unexpected expenses and can’t pay your debts, there is still a way out – actually, there are several. First, you can declare a bankruptcy. This step is very serious, of course and has the consequences, but as a result, you have a legal right not to pay money you owe to creditors. If creditors relieve you from debt repayments, they will send you a Cancellation of debt form (1099-C). It provides information about the exact sum that was relieved. The tricky thing is though that you have to add this “forgiven” sum in your Income Tax Return form. However, if you can prove that your debts should be excluded from your gross income, you won’t pay taxes on them. In this case you have to fill in IRS form 982 and the Insolvency Worksheet. We’ll discuss the purpose of this worksheet in detail below.
Who needs to complete an Insolvency Worksheet?
A person who wants to prove to the IRS that their debts were canceled or settled should complete and file the Insolvency Worksheet.
What is the Insolvency Worksheet for?
When some or all of your debts are canceled by your borrower, you obtain a 1099-C form – it shows the amount of money that was canceled. The IRS adjusts the reduction of debt to income. IRS policy is based around the premise that if income increases, the amount of tax to be paid should be increased as well.
The aim of an applicant is to prevent this extra money from being qualified as income so that there will be no need to include it on the individual’s tax return.
Is the Insolvency Worksheet accompanied by other forms?
You should print out and include any proof of the fair market value of your assets and the balances of your liabilities including bank statements, online values, appraisals, balance sheets. You never know when the IRS is going to ask you to provide full documentation.
When is Insolvency Worksheet due?
This form should be completed and filed when your debts are canceled. No specific deadline is provided.
How do I fill out Insolvency Worksheet?
You should provide the following information in order to complete the form:
- Name of the creditor;
- Amount of the canceled debt;
- Total liabilities the day before the cancellation (credit card debt, vehicle loans, medical bills, business debts, etc;
- Fair market value of assets owned the day before the cancellation (cash and bank account balances, residences value, computers, cars, tools, jewelry, clothing, etc.)
Where do I send the Insolvency Worksheet?
Once completed, this form should be kept for a person’s personal records. The taxpayer must submit it at the IRS’ request.