Credit Card Settements, 1099-C's, Form 982, and Insolvency :-(

[walkin]

I settled 2 cards last year, received 1099-C's for both (as expected).

Before completing the settlement process, I spoke with a CPA about the tax implications, and specifically about Insolvency. (lol, he actually suggested that I speak to a BK lawyer before I completed these settlements). I told him what was going on, and told him that I thought I wouldn't have to pay taxes on the amount of debt discharged, because I would be insolvent at the times of settlement. He didn't know what I was talking about, and said something about having to reduce my basis (or something like that) on my rental property? And if that is what I am supposed to do (reducing rental property basis), does that just mean that I will start receiving less depreciation, and also, does it still mean that I won't have to pay taxes on the forgiven CC debt from last year?

I've read Publication 4681 (Canceled Debts, Foreclosures, Repossessions, and Abandonments) until my head hurts. I've already completed 2 separate Insolvency Worksheets (one for each 1099-C), and I am insolvent for both. I'm confused about the form 982. I understand that I fill in Part 1, box 2, and check mark Part 1 box 1b. I'm confused which box I fill in under Part 2.

If anyone who has completed this process before has any pointers, I'd really appreciate it. I've done my own taxes for almost a decade, which have been pretty straight forward up until now, and I'm not going to throw in the towel and go pay someone to do my taxes for me! (not just yet anyway)

Thanks ahead of time!

 

[Suzy Sunshine]

I hope there will be some responses about this. I've been able to save about 25K on settlements made so far this year. That's going to be a huge amount of taxes if I can't show insolvency. It seems like I should be able to just add up the the assets and liabilities, but nothing is simple with the IRS.

 

[walkin]

I kept meticulous financial records before, during, and after settlements. I printed out statements of every asset and liability to support my insolvency claim. When you fill out the insolvency worksheet, you use all of your assets and liabilities the day before the event (settlement/cancellation). You use a different insolvency worksheet for each settlement. That's the biggest reason I settled these things in the order that I did. I needed the 2nd mortgage liability to help me stay insolvent, so I settled the cards first. Then, I settled the 2nd mortgage last, which will be covered under that other debt forgiveness program, if/when they 1099 me. The insolvency part is the easy part. As I have discovered, what to do with this insolvency worksheet, as far as transferring it over to the form 982, is the hard part, for a rookie like me. lol.

I think I'm going to put the amount of discharged indebtedness excluded from gross income (Part 1, line 2) on Part 2, line 5, and reduce my basis in the rental property by that amount. I THINK that is what I need to be doing, but not sure. I've been reading all day about this crap, and have a headache. I'll do some more research and see if that's the best way to do it. Ugh...

Good luck with yours Suzy Sunshine. Just an FYI, if you can't exclude that income from your gross, you may be looking at paying around 35-40 percent tax on the forgiven amount :O (depending on your tax bracket I guess, not sure). I did a "what if" scenario on my taxes, to see how much taxes I would have had to pay on my 1099C's if I didn't exclude them, and it was like 38 percent...ouch. (I'd owe around $6k or so on about $16k of COD) That would have been a nice little surprise, had I not kinda known about the insolvency rule. Probably why I had a couple people (including a CPA) pushing me towards filing bankruptcy instead of settling. I obviously don't know wth I'm doing on my taxes, especially with this form 982, so I really can't offer you any suggestions or help, sorry :-(

 

[walkin]

Disregard this thread, I figured it out. Thanks.

/thread

 

[Suzy Sunshine]

walkin - if you don't mind, can you share some more about filing for insolvency? thanks

 

[walkin]

Hi Suzy, there are much more qualified people than me who might be able to help you. I just kinda winged it, lol.

The insolvency worksheet is the easiest part. You fill in your liabilities and your assets, the day before the settlement happens. The insolvency worksheet is pretty much up to your discretion, as far as how you fill it out, but I'm under the assumption that if someone receives 1099-C's and doesn't pay taxes on it (because they used insolvency), the IRS will surely perform an audit, though I could be wrong. That is why I printed out every statement I could think of, reflecting balances of assets and debts, etc, for each of the 2 settlements, and I filled in the numbers with no gray area. If you didn't do any of that, go ahead and start plugging in the numbers now, since you settled recently, and should have access to all of your recent bank statements, etc. Complete an insolvency worksheet for each settlement. IMO, it is a good idea to start thinking about these things before settling, but it is never too late. I think I read something somewhere that only 10% (or so) of people who receive 1099-C's use the insolvency rule, who may have been otherwise eligible. (don't quote me, going from memory here). And the rule isn't very clear. The IRS doesn't even seem to give absolute guidance on it.

You will notice that when you complete Settlement #1, your "credit card debt" will be $xxxx.xx. After you complete that settlement, your CC debt will go down, and so should your cash/checking account balances. So, when you complete Settlement #2, your "credit card debt" should be less than it was the first time (since you settled the first card), and perhaps your cash/checking went down too. So on and so forth.

When it is time for you to answer to the 1099-C's (when you file your taxes) you will use your insolvency worksheets to help you figure out how much of the cancelled debt can be excluded from your gross income. Form 982 will be used to record the numbers. The tricky part, is which line you put the amount on. Well, maybe it is easy for other more experienced people, but it took me about 12 hours of reading and research until I was finally comfortable with which line to put that amount on, lol.

IRS Publication 4681 pretty much goes over everything. On page 8 of the pub, you will see the Insolvency worksheet.

http://www.irs.gov/pub/irs-pdf/p4681.pdf

They give a few insolvency scenarios in that publication, which should help guide you through it. If it is too complicated (like it was to me), you might want so spend a little money on paying a CPA to do your papers for you. I'm hard-headed though, so I just kinda got through it on my own.

Like I said, I really can't give you any advice on how or what to do with your individual tax situation, just sharing how I did mine. Afterall, I initially only knew about the insolvency worksheet, and figured that I'd just check a box somewhere and the cancelled debt would be gone, poof..lol, not the case. Uncle Sam wants to get his share, one way or the other..... Good luck with yours!

 

[Suzy Sunshine]

Thank You Very Much!

You've put a lot of thought into this. Looks like I have a bit of homework to do. Just from a quick look at my numbers, it's going to be close with the insolvency for me. But the great settlements I've been able to get will be lessened severely if I have to pay much of the savings to the IRS.

 

[bacon_]

Like walkin, I had to read the IRS legalese guide at least a few times to figure it out. I got a spreadsheet out and did the math that way. All assets, cash-in-hand, accounts, stocks, etc. minus all liabilities, debts, credit cards, loans, etc. If you still have assets ($1 or more) after that calculation, you aren't insolvent. If you get a negative number or $0 (more liabilities than assets) you are insolvent. It gets even more complicated if you have more than 1 settled account at different times. You'll need to do the calculation for each 1099-c in chronological order.

There are two main insolvency calculations:
1. The day right before the settlement was completed. This calculation includes the forgiven debt in the settlement in the liabilities class. Ex. settled on 05/22/2013, do calculation of assets-liabilities as of 05/21/2013. If $5000 assets minus $4000 liabilities=$1000 of assets still in possession, not insolvent. If $5000 assets-$10,000 liabilities= -$5000 in assets, are insolvent. Important: this calc uses the FAIR MARKET VALUE of assets (what someone would reasonably pay for asset x, i.e. ebay, craigslist, private buyer). So depreciation is factored. Cash is face value, but cars, clothing, electronics, etc. take the depreciated value.
How much you can exclude from the 1040 depends on amount insolvent vs. cancelled debt vs. FMV of assets. It's explained with examples in IRS 4681 guide under Insolvency.

2. This calculation is done the day after a settlement to reevaluated any remaining assets and is used in the Part II of the 982 form. Important: this calc uses the COST BASIS VALUE of assets (what the asset cost you originally; i.e. retail value). Here you calculate assets after the settlement (at COST VALUE) minus any liabilities, debt left over.
A positive number, for example $100, means you have to devalue remaining assets by $100. So now, for example, your wedding ring (e.g. asset/property) is worth $100 less (if selling in future), which would be $100 on line 10a of 982. You've declare to the IRS that your asset(s) is worth $100 less (or devalued by $100).
In another example, say $800 assets (cost basis) minus $15,000 remaining liabilities/debt = -$14,200. Way more liabilities still remain. So on line 10a of my 982 I put "$0". Because you can't devalue property by a negative number; it's already "worthless". Congratulations, I'm still broke.

Extra: I believe the assets measured for calc 2 are the same as calc 1, you're just adjusting the value of the asset, (i.e. FMV vs "retail" cost), increasing the value of the asset to its "original value" for calc 2.
There are three options for line 10a, you list the smallest of: a)cost basis value of assets b)total cancelled debt c)cost basis of assets minus liabilities. There's a section in the instructions that explain this. You'll have to look at your individual situation. Ex. a)$1k cost basis value of remaining assets b)$5K cancelled debt c) -$3k (cost basis assets minus liabilities; e.g. $0) then c) is the smallest and that goes on line 10a. This is where spreadsheet formulas helps to decide which number you should write on line 10a.

IRS says if debt is forgiven, fine. But in exchange for forgiveness, in certain cases, they reduce remaining value from your assets (for when/if you sell them in the future). There is also a depreciation of real property in the 982, but that didn't apply to me, can't help there.

The 982 insolvency worksheet covers most assets and liabilities classes. Supposedly you don't have to mail it in with the 982, but it can't hurt and might avoid triggering an audit. Plus I kept all the of the spreadsheet math, receipts in case of audit. My spreadsheet was more granular than the 982 worksheet, I listed every single item. On the worksheet you can combine like things; like household goods, clothing, small electronics. Just keep the proof of calculations/worksheet in case of audit.

Anyone else, feel free to correct or clarify. I'll admit it is difficult to explain and the IRS instructions are wordy and unclear at best. Plus the IRS splinters the information, so you have hunt down 2 or more sources/manuals to get educated. IRS 4681 and 982 instructions are the important ones here. Well organized spreadsheet helps a lot with the math.

 

[walkin]

Nice explanation bacon!

"If you still have assets ($1 or more) after that calculation, you aren't insolvent.".

To be clear, this doesn't mean you are responsible for the full amount of the 1099-C, correct?

When I did mine, I had 2 of them I had to deal with. I printed out statements of everything immediately prior to each settlement, to establish values of assets and liabilities/debts. And also printed out statements of everything immediately following the settlement dates. For the first 1099-C, I was fully insolvent. For the second 1099-C, I was mostly insolvent, but was responsible for taxes on a couple grand or so...I was feeling generous I guess. Could have easily skated for the full amount, had I been a little more aggressive with asset values (vehicles, etc.), but I chose to keep everything legit, and valued them fairly.

Since I fumbled my way through the tax part, I kept all statements and sheets and what not, in case I get audited. I'm pretty sure all my calculations were correct, so the worse thing that can happen is them telling me that I did something wrong with which boxes I used, or whatever...but the $ part is correct.

I filed my taxes using TT desktop, and it automatically sent the 982 Insolvency Worksheet to the IRS, with all the other forms...seems fine with me, like you said, should give them less of a reason to do an audit.

And you are right, if you haven't dealt with this kind of thing before, it's a royal PITA trying to read all the right materials, and have halfway of an understand what you think you are supposed to do, lol. Google is your friend, as well as the publications/instructions that you listed.

 

[bacon_]

I believe you are correct. Either you are insolvent and can use the 982 form OR you're not; there is no partial insolvency. At least that's how I understood it. I also had more than one 1099-c but was insolvent for all. I believe if you have more than one 1099-c, and calculate solvency for one or more (mostly likely the second/third/fourth, etc), then you pay full taxes on 1099-c(s) for which you were solvent.

But, like you said, insolvency assets are Fair Market Valuation, so there is wiggle room. As long as you don't claim your used Porsche to be worth $1000.00 or something. I recommend what you did, keeping receipts and sources (Kelly Blue Book, etc.) for how you came about a value for asset x.

More than one 1099-c is a little tricky, you have to calculated insolvency for each one, in chronological order. When tallying up the 1099-c's, as you move forward chronologically, you move closer to solvency (with each debt that is forgiven). Where you end up depends on your individual situation.

Mine were mailed in, not e-filed, and included the general 982 worksheet. I thought TT wasn't able to handle multiple 1099c's so I just did it by hand. The 982 really is only one extra page, two parts. Who knows what triggers the audit, but as you did, I just assumed showing the math would make it more credible. Plus you have your own receipts/sheets to back up your math, in case. Scanning all this info into a PDF for record keeping is a good idea too. Makes proving anything way easier.

Your earlier posts were very helpful, to myself included. I might post a screen shot of my own worksheet layout, change the numbers of course. It's much easier to explain in a spreadsheet and I've got the formulas set up for plug n play.

 

[bacon_]

worksheet layout

Here is my own worksheet layout (plugged in random numbers), as an example of the calculations mentioned. Obviously the numbers/assets/liabilities will be different for everyone, but this is a good way to organize yours. Should help you to understand the 982 insolvency form. Click image for full size.

 

[nbtapia1]

Bacon, thank you so much for your post

 

[Stevens]

Here is my own worksheet layout (plugged in random numbers), as an example of the calculations mentioned. Obviously the numbers/assets/liabilities will be different for everyone, but this is a good way to organize yours. Should help you to understand the 982 insolvency form. Click image for full size.

I have 3 1099C's for Credit Card debt from Chase that I received last week. I totally understand the Workout sheet. I understand on Form 982 that I select 1b on Part 1. What I cannot figure out is what line to use in Part 2?

If anyone can advise I would really appreciate it. Thank you.

 

[TomEason]

Stevens

Welcome to Loansafe.

I recommend you ask your tax person how to complete the 982, or visit the IRS site; there are instructions there on how to complete it.

 

[Stevens]

Stevens

Welcome to Loansafe.

I recommend you ask your tax person how to complete the 982, or visit the IRS site; there are instructions there on how to complete it.

I am using Turbo Tax. I have read the IRS instructions about 10 times and I still cant see where to fill out Part 2.

Thanks anyway.

 

[nbtapia1]

Stevens, it looks part II it is not the for credit cards. see: http://www.irs.gov/pub/irs-pdf/f982.pdf

 

[nbtapia1]

I am using Turbo Tax. I have read the IRS instructions about 10 times and I still cant see where to fill out Part 2.

Thanks anyway.

Stevens look example at page 16 http://www.irs.gov/pub/irs-pdf/p4681.pdf

 

[TomEason]

Stevens

Thanks for your post.

If I were you I wouldn't rely on TT (which I've used for years). As nbtapia1 states, I recommend you visit the IRS site.

 

[bacon_]

I have 3 1099C's for Credit Card debt from Chase that I received last week. I totally understand the Workout sheet. I understand on Form 982 that I select 1b on Part 1. What I cannot figure out is what line to use in Part 2?

If anyone can advise I would really appreciate it. Thank you.

This depends on your situation. Hard to say without more info.

Page 9, 10 of publication 4681 gives an example of personal-property, one where person's assets need to be devalued. For Part 2, there's an A-B-C list where you need to choose the smallest value for line 10a. It goes:
A. value of all personal-use property (held at beginning of next tax year)
B. amount of cancelled debt you're excluding from line 2
C. the excess difference of total base value of property/cash minus total liabilities after cancellation.

Are you asset insolvent and C is the smallest number of A-B-C? Example for C. --> value of all remaining assets ($1000) minus all remaining liabilities ($9000) = -$8000 = $0. (A)$1000 > (B)$570 > (C)-$8000/$0, So on line 10a you'd write $0, because you can't have a negative value for assets. -$8000/$0 just means you're insolvent; assets worth less than remaining liabilities.

If your number C. is $0 or less (i.e. -$8000) then $0 goes on line 10a and that's it. In that situation, if you sold all your assets you'd still be in the hole (liabilities > assets), so there's nothing for them to devalue.

If you come up with a number for C., say $100 (and $100 is the smallest of A-B-C), then you put $100 on 10a and then devalue all your remaining property proportionally. Not by $100. Something like, car $100 x car value/total asset-cash value and then say jewelry $100 x jewelry value/total asset-cash value etc. The example is on page 9-10 on the 4681 pdf @ IRS site.

Those were just examples for 10a, Choice C. though. Some of the other lines in Part 2 are for devaluing real estate, maybe a big ticket item, "depreciable property", like a car. etc. Essentially if you cancel debt, the IRS makes you "pay" by devaluation of your remaining thing(s).

After re-reading 4681, looked at my old worksheet, my example devaluation part was a little off. It's supposed to be as above, where you devalue proportionally. They don't really explain proportional devaluation clearly, i.e. Proportional devaluation = "Choice C" times value of asset being devalued divided by total asset/cash value. Wish they would make that clearer.

 

[paperbag]

Statement of Insolvency worksheet

Glad I found this thread. I just registered with loansafe.org, so this is my first post.

I've read Form 982 and Publication 4681 thoroughly. I'm using the commercial TurboTax Deluxe. I have one debt that was canceled by the bank. It was a student loan debt. I have no other debts canceled.

My question is about the "Statement of Insolvency" that seems to be required. TurboTax is including it as a required form in my tax return, which I think is a good thing to do.

This Statement of Insolvency has 5 parts
1. Debt cancellation information
2. Other real estate
3. Liabilities
4. Assets
5. Amount of Insolvency

Ironically my question isn't about the nitty gritty calculations of parts 3 or 4, since I've done all those myself after reading Publication 4681 thoroughly.

What I am confused about is, what to enter for "Part 1 - Debt Cancellation Information", at the very top of the worksheet.
Part 1a is "Date of cancellation". Ok that's easy, it says the date of cancellation on the 1099-C.
Where I get confused is Part 1b. Part 1b says "Real estate for which debt was canceled". Then under part 1b there are three numbered rows
(1)Value
(2)Recourse Liability
(3)Nonrecourse Liability

But my debt wasn't real estate, it was an unsecured student loan. Right now I have left this field blank. But my worry is, if I leave this field blank, there is no where at all on the Statement of Insolvency that I list the actual dollar amount of the loan that was canceled. Shouldn't this be listed somewhere on the Statement of Insolvency?

I would greatly appreciate if anyone knows how to handle this specific question. I just need this one last question answered before I file this unholy tax return.