I am filling out form 982 for insolvency, and I don't know what to fill in for section II. Can someone explain section II (Reduction of Tax Attributes) for me?

Cancellation of Debt and Insolvency are a little complex but not complicated. Following the reasoning and steps below will keep things straight for you, produce a clean return and shouldn't take too long. If you have any other details regarding this question, please feel free to post them in the comment section. 

Just a little background to cover the bases:

A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may be excluded as income under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent

However, the debt cancellation must be reported and you must claim that you're insolvent on your return. The canceled debt will then become excluded from income.

If you are reporting any type of debt cancellation other than qualified principal residence exclusion that TurboTax handles, we generally recommend using the CD/Download version of TurboTax Deluxe or a higher edition. With either of these versions, you'll be able to easily make a notation regarding your solvency.

If you started your 2017 return in TurboTax Online and want to switch to the TurboTax download/cd version, click here.

Note: if already paid for TurboTax online, contact our support representative ; otherwise proceed with the desktop purchase.

Once you have the Download/CD version, there are four steps to claim your exclusion.

There are 4 steps to ensure that your income is excluded:

1.        Enter Form 1099-C

2.        Create  the Insolvency Worksheet

3.        Check entries on Canceled Debt Worksheet

4.        Check Form 982

1. Enter Form 1099-C

To enter your 1099-C:

1.       Open (continue) your return, if it's not already open.

2.       In the TurboTax program, search for 1099-C or 1099C (lower-case also works) and then click or tap the "Jump to" link in the search results.

3.       Select the type of canceled debt (main home or other) and then click or tap Continue.

o    If using Free Edition, follow the prompts to upgrade to Deluxe.

4.       Follow the onscreen instructions to enter information from your 1099-C.

It will say that "Your Debt is Taxable", however, the following workaround will exclude it from income.

2. Create  the Insolvency Worksheet

Click Forms in the upper right corner of your screen

Click  "Open Form” (button on the top Left). 

In the “Type a Form Name” box at the top, type “insolvency”. 

Select the form that pops up and click Open Form.

Fill out the form which will give you the Amount of insolvency at the end on Line 7.

3. Check entries on the Canceled Debt Worksheet

In "Form Mode", scroll in the left column to Canceled Debt (Copy 1) and Click. It will open the form.

Scroll to Part VIII - Exclusion for Insolvency

On Line 53 "Were you insolvent?  Make sure it's checked Yes

On Line 54 "Amount of Insolvency" carried from Line 7 of Insolvency Worksheet.

On Line 57 "Amount Excluded"

If your total liabilities exceeded the total FMV of your assets at the time of the cancellation, you may exclude the canceled debt to that extent. Complete the "Statement of Insolvency" to compute and document the amount of insolvency.

4. Check Form 982

In "Form Mode", scroll in the left column to Form 982 and Click. It will open the form.

Make sure that  Box 1b is checked to exclude your income to the extent insolvent.

Once Form 982 is complete you will want to review Form 1040 "Other Income" line. This is the amount of your canceled debt that's taxable. If you were insolvent, it should be zero or at least less than the total canceled debt from the 1099-C