I need to know about the insolvency exception for 1099-c. Do I qualify? How do I claim insolvency?

[MargaretL · Accepted solution]

To qualify for the insolvency, you must show that all of your liabilities (debts) were more than the Fair Market Value of all of your assets immediately before the cancellation of debt.

To show that you are insolvent and are excluding your canceled debt from income, you must fill out Form 982.  Although the form is available in Turbo Tax, it is not available on line.  You would have to use a cd/download and fill out the form manually, there is no interview questions for this.

I recommend that you first read the following links and fill out the insolvency worksheet and the form from the IRS website. Once you have completed it, purchase the cd/download to enter the forms' information into the software.

Please refer to page 5 for insolvency explanation and page 8 for insolvency worksheet:
https://www.irs.gov/pub/irs-pdf/p4681.pdf

Form 982 and its instructions:

https://www.irs.gov/pub/irs-pdf/f982.pdf

[TBorch]

I received a 1099C and am about to fill out form 982 (insolvency worksheet). I have already purchased the Turbo Tax cd. After I get this filled out, where am I able to enter this info. in Turbo Tax? Would someone please help me with this? I have to file my taxes for 2017 by Jan 15, 2020! 

Terri

[BillM223]

TurboTax does not have an interview for form 982, which is where you report your insolvency exception. 

To get to form 982,

• you need to have the desktop software (which you already do),
• then you need to go into Forms mode.

Once in Form mode,

• click on the icon "Open Form" (upper left),
• then search for 982, 
• and when that form comes up, highlight it, and then click on the "Open Form" button at the bottom.

This will open form 982; however, you will need to complete it yourself. This is why TurboTax advises you in this situation to seek the help of a local tax pro.

[KB231]

Regarding the insolvency exclusion... it states that you calculate your liabilities and assets immediately before the cancellation of debt. So I would awesome the debt that has been cancelled would be included in the liabilities. Is this correct? I'm hoping so!  Also, do you know if the same applies for Massachusetts state tax?  

[ThomasM125]

Yes, the debt cancelled would be included in the liabilities to determine your insolvency. 

When you prepare the Massachusetts return in TurboTax, the federal income will be used as your Massachusetts income starting point. So, you will start out with the debt forgiven.

I suggest you work through the program and see if there is any mention of adjusting the federal income for the debt forgiven. In other words, follow the instructions in the state program and you should come up with the correct result.

[highreturn]

So if my end amount is (-) than I am not insolvent? It has to be a positive number? Can life insurance be considered a liability? It's confusing how they say subtract this number from this and then if it's negative you are insolvent according to the website. 

[DianeW777]

Your question is if my liabilities exceed my assets and a negative result occurs are you considered insolvent.  The answer is yes, based on the IRS worksheet and your numbers. Life insurance would fall under the category of 'Other liabilities' on the worksheet.

• See IRS Publication 4681 for more information about insolvency. This is a worksheet that is prepared to determine if you can qualify for eliminating taxable income form a cancelled debt (Form 1099-C). Keep it with your tax files to show proof, as well as any other documentation to substantiate it, should you need it later.

[bhvhvkh]

I got the turbotax CD version. So I understand the exact process here for multiple 1099-C's where I was insolvent on different dates:

- Skip the interview question about cancelled debt

- For each cancelled debt / date:

   - Fill out a 1099-C

   - Fill out an insolvency worksheet

- Fill out form 982

Is this correct? If not can you help me get the correct order.

Thank you

[JeffreyR77]

That is correct.  For each 1099-C that is not for debt forgiven for a primary residence.  You need to complete an insolvency worksheet to determine your insolvency immediately prior to the forgiveness and immediately after for each case. That amount then gets entered on Form 982 for that debt discharge.

[MaxU]

I filled out the form 982 in the forms section; however it is not adjusting the total amount that I owe at the top of the screen and turbo tax is asking me to submit the payment including the taxes I would owe on the income from the 1099-C.

How should a proceed to pay the proper amount of taxes when I file my return? Since there isn't an interview question and this form is not part of the standard turbo tax program how to it to use the data from the 982 form when calculating my tax burden?

[MarilynG1]

@MaxU If you entered the 'Exclusion for Insolvency' on the Cancelled Debt Worksheet (screenshot), you should not see this amount included in 'Other Income' on Schedule 1, Line 8 (screenshot). 

You are correct that the Refund Meter may not change; however, the amount will be excluded on your Form 1040 total income.

[DolceDolce]

Hello there ... I've been following and reading the replies ...

I understand the basis for the insolvency worksheet, and then the form 982.  I'm confused on how to do the 2nd one, and those thereafter.  Unfortunately, I have about 8 to do.  

I'm wondering if this gets easier on the 2nd one?  Would the form basically stay the same, except that now I will be reducing my liabilities by the amount of total debt from 1099-C #1.  And then after the 2nd Form 982, the 3d 982 form, would be total liabilities, which will now have been reduced by total debts cancelled from #1 and #2?  Is it this way that the rolling reduction of liabilities continues on down?  Also, as I updated the 982 form each time, do I then have to update the Worksheet?  

OR do I do multiples 982s, and then enter the total 1099-C one time on Turbo Tax?

Thank you for the guidance!

[la111]

I was also struggling with this form. But Here's the guidance from the IRS 2021 publication 4681 for when you were insolvent by the amount higher than the canceled debt:

When completing his tax return, Greg checks the box on line 1b of Form 982 and enters $5,000 on line 2. Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Greg doesn't include any of the $5,000 canceled debt on Schedule 1 (Form 1040), line 8c. None of the canceled debt is included in his income.

So my understanding is, you don't even need to include any of the info from your 1099-c as long as you fill out form 982 properly. This way, your income and refund meter will reflect things correctly. Hope it helps.

[Raymond316]

I need to file two 1099-C forms from two different creditors