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Debt Relief – Insolvency – Bankruptcy Information » Bankruptcy Help, Debt Relief, Featured Articles, Insolvency » Form 982 to Avail of Reduced Taxable Income on Forgiven Debt

Form 982 to Avail of Reduced Taxable Income on Forgiven Debt

If you have any financial obligation that was partly or entirely forgiven, you must file Form 982 to report “discharge of indebtedness.” In most cases, the amount you have obtained as forgiven debt is included in your gross income and is, therefore, taxable. Under certain circumstances as described in IRS Code Section 108, you are allowed to exclude the discharged debt by filing Form 982 together with your income tax return. With this form, exemptions can be availed so you don’t have to pay taxes on the cancelled debt. Common exclusions include bankruptcy, insolvency, non-recourse loans and indebtedness due to real property losses.

When an individual qualifies for debt forgiveness, the lender will send form 1099-C also called Cancellation of Debt. The forgiven amount appears on this form in box number two. You can then download Form 982 or the Reduction of Tax Attributes Due to Discharge of Indebtedness at the IRS website along with special instructions on how to complete the form. Fill out the lines based on your type of discharged debt and make sure all required fields are completed. The last step is to file your taxes along with Forms 982 and 1099-C before April 15 of the year.

Filing Insolvency with the IRS

When your debt is cancelled by a financial institution, the forgiven debt is exempted from taxes. The taxpayer is considered insolvent if his total debts incurred are more than the total assets. Insolvency status must be proven before the cancellation of debt was done. An IRS insolvency worksheet is required to provide details on the total liabilities and assets acquired the day before the cancellation happened. Assets include all valuables that can be converted into cash while liabilities comprise all debts owed.

The insolvency worksheet will calculate the extent of insolvency before cancellation of debt was obtained. A list of your assets is compared with your liabilities. If the total amount of your liabilities exceeds the fair market value of your assets before any settlement was done, then the IRS considers you insolvent. Being insolvent exempts you to report the amount as income but you have to file for insolvency because your creditors already sent a copy of your 1099-C to the IRS.

Understanding Form 1099-C

When a debt is forgiven, creditors can file IRS Form1099-C to report the account as settled. The cancelled amount is regarded as income to the recipient because the unpaid amount benefits one whose obligation to pay was called off. Form 1099-C states a description of the debt, the date of the cancellation of debt, the amount owed that was cancelled and whether the debtor has sole responsibility for the debt. A checked box notes that the debt was cancelled due to bankruptcy.

Failure to address the 1099-C will result to a tax assessment and further penalties and interests on amount exceeding $600. As soon as you receive this form, get help from an accredited tax preparer so you can file Form 982 to reduce the taxable income from cancelled debt or qualify for tax exemption.

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