Excluding 1099-C Through Tax Insolvency
For certain taxpayers that become subject to tax obligations for cancellation of debt through settlement of unsecured obligations or the forgiveness of mortgage debt, a declaration of tax insolvency may be the answer to their problems. Taxpayers that were "insolvent" immediately before the forgiveness of debt can use this exception to avoid taxes on otherwise taxable forgiveness of debt.
The legal team at the Law Offices of Neil Crane, LLC, can help you determine whether you are insolvent for tax purposes. Contact our attorneys online, call us at 203-230-2233 or toll free at 888-249-3027 for a free initial consultation.
How to Calculate Tax Insolvency
To calculate tax insolvency, the taxpayer must calculate the total fair market value of all assets and subtract the total of all liabilities before the debt was canceled. If liabilities exceed assets, and the negative number exceeds the amount of the debt canceled, there is no tax on the forgiveness. If the negative number is less than the full debt relieved, the forgiveness is taxable to the excess amount forgiven. There are specific and complicated rules on calculating what qualifies as assets, (i.e. collateral and pension, IRA exempt assets, count, etc.), and what qualifies as acceptable liabilities. The use of a specialized attorney or tax accountant is necessary to prepare a proper application under Form 982.
There are also special rules for different types of debts, including:
- Recourse debts
- Non-recourse debts
- Undersecured debts
- Joint and several debts
- Joint and separate returns
Additionally, there are special rules for reducing tax attributes as part of a Form 982 Insolvency Request.
To learn more about the benefits and proper applications of tax insolvency, call a qualified tax relief lawyer at the Law Offices of Neil Crane, LLC, at 203-230-2233 or toll free at 1-888-249-3027. You can also contact us online to schedule a free consultation with an attorney at our firm. We have office locations in Hamden, Bridgeport, Ridgefield, Waterbury and Rocky Hill, Connecticut.
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