Click Here For Help On Loan Modification!
By Eva Rosenberg, MarketWatch
LOS ANGELES (MarketWatch) — Many folks have lost a job or watched their income plummet during this financial crisis, and that’s meant more people defaulting on their credit-card or other loans.
So here you are, in early 2009, having defaulted on your credit card debt and ruined your credit — and you’re staring at a1099-C. After losing so much already, you face the added difficulty of owing taxes on cancellation-of-debt income.
Talk about being in the pit of despair. Where are you going to get the money to pay these taxes when you have absolutely nothing left to tap?
Hold on a second!
You might be able to avoid those extra taxes altogether, said Bill Fleming, a managing director in PricewaterhouseCoopers’ Private Company Services Practice.
The rules and computations are complicated, so you may need some help. But the great news is this method does not require you to file bankruptcy.
Insolvency 101
This technique is as old as the hills. There’s even a form to use to let IRS know how much cancelled debt doesn’t need to be taxed because you are insolvent. See Form 982 on the IRS site (PDF).
Use Line 1b for credit card debt. You can see there are other lines for business real estate and your personal residence. Unfortunately, despite four pages of instructions that come with this form, IRS does not provide a worksheet to help you calculate just how insolvent you are.
Why is that important? You can only exclude cancelled debt from your income up to the amount that you are insolvent before the debt was cancelled, Fleming said. So let’s say you get a 1099-C that shows the lender wrote off $50,000 of credit card debt on June 15. You will need to create your own worksheet summarizing your assets and debt, including this $50,000 debt. For this calculation, remember to include the balances in your IRAs and retirement accounts. (According to Fleming, in a bankruptcy, you wouldn’t need to takes these funds into account.)
To really simplify the explanation, the amount of your insolvency on that day is the difference between your total debt and your assets. So, suppose that on June 15 your total debt, including mortgages and unpaid taxes, add up to $450,000. Let’s say that on that day, the fair market value of your home, savings and retirement accounts, the cash value of your insurance policies, used cars, furniture and personal property all add up to $405,000.
That means, on the date shown on that 1099-C, you were only insolvent up to $45,000 ($450,000 – $405,000). That means you will have to pay tax on $5,000 of the cancelled debt.
You’re going to want to do this worksheet on the date that each separate debt was cancelled, Fleming said. That’s a twist many people overlook when they do insolvency calculations.
After all, when the debts get cancelled on different dates, you will have a different balance as each successive debt is cancelled. You will also have a different balance of assets and money in the bank on each date.
For instance, suppose you have another $25,000 credit card debt cancelled on Oct. 1. By this time, the value of your retirement portfolio has dropped dramatically (down $30,000), as did the value of your home (down $100,000).
Using the same debts as before, less the $50,000 that was cancelled in June, your new balance of debts will be $400,000.
That is, your new asset balance with those declines in fair market value will be $275,000 ($405,000 less retirement-plan drop of $30,000 and home-value decline of $100,000). On Oct. 1 you are insolvent to the tune of $125,000 ($400,000 – $275,000). As a result, on that day the entire $25,000 cancelled debt is excluded from income. It was worth doing a second calculation, right?
Let’s face it, if you’re at the point where the credit card companies and other lenders are writing your debt off as uncollectible, you’re probably insolvent, even without filing for bankruptcy. It’s just a matter of proving it to IRS.
A price for insolvency
Naturally, to take this cheaper, easier, non-bankruptcy option to get out of tax, there’s a price. You must have proof of your debt and asset balances at each date. Fleming said that the higher the amount of cancelled debt you exclude from income, the more careful you want to be with your back-up documents. In some instances, it may be worth the price to pay for appraisals showing the value of key assets on the specific dates.
You can get free documentation of some asset values on the Internet. For instance, MarketWatch has a tool to help you get stock values on specific dates. See the tool.
You can get vehicle values at Kelly Blue Book (KBB.com) and Edmunds.com.
You may be able to find the value of other personal assets on eBay.com or even use TurboTax’s ItsDeductible tool, which is now free. See the site.
Keep copies of loan balances on those dates. Get them from the lenders and put a copy of the documents in your tax file. You don’t need to send any of this to IRS. But the larger the excluded balances, the higher your chance of getting audited.
Yet another price
Look back at Form 982. Do you see Part II where it says “Reduction of Tax Attributes”? This is where you’re going to take the amount of the excluded debt and reduce a variety of tax benefits you’ve been carrying over for a while. You’ll lose net operating loss carryovers, foreign tax credits, capital loss carryovers and more.
Remember, you still have to report the income from that 1099-C on your tax return. But you will also get to remove the income by following the instructions on Form 982.
Can’t do it alone? Get help!
Start with the guidance on the IRS site, which has links to resources to help you with insolvency and the special relief rules for residential real estate from the Mortgage Forgiveness Debt Relief Act of 2007, which we haven’t discussed here. See more on IRS.gov.
Folks who want to avoid a lot of tax on this phantom income, be darn sure you get these computations right. Consider investing a little money in a tax professional with experience dealing with insolvency. This is too important to trust to someone who’s learning on your dime and your time. You don’t want to find out two years from now that you did it all wrong and suddenly have to pay taxes you didn’t expect.
Still, if the tax professional makes a mistake, typically the IRS will be more lenient with the penalties than if you made the error. After all, you can prove that you made a good faith effort to get it right.
How do you know someone really has experience? Bill Fleming came up with a great idea: Ask the tax pros if they have a standard worksheet or spreadsheet you can fill out to give them the information for the debts cancelled at different times during the year.
Wait for a response. If you get a blank look, give the person a clue: “You know, since my asset and liability balances were probably different on the date of each cancelled debt?”
Still getting a blank look? Get out fast. Repeat the process until you find someone who understands.
ARTICLE FROM MARKETWATCH.COM.
I like your blog design. What template did you use ?
I wanted to thank you for this great read!! I definitely enjoying every little bit of it I have you bookmarked to check out new stuff you post
I Really realize what your position in this matter is. Though I should disagree on a number of the finer details, I think that you did a wonderful job explaining it. Definitely beats having to study it by myself. Thank you.
Thanks for taking this opportunity to discuss this, I feel strongly about it and I take pleasure in learning about this topic. If possible, as you gain information, please add to this blog with new information. I have found it extremely useful.
I am so happy that I visited this website today. Its and interesting website with useful and relevant information. Its not everyday that you find blogs with such relevant information to what you are searching for.
I will be popping back later today
Hi. I wanted to drop you a quick note to express my thanks. I’ve been following your blog for a month or so and have picked up a ton of good information as well as enjoyed the way you’ve structured your site. I am attempting to run my own blog but I think its too general and I want to focus more on smaller topics. Being all things to all people is not all that its cracked up to be.
Hello, I have browsed most of your posts. This post is probably where I got the most useful information for my research. Thanks for posting, maybe we can see more on this.
Absolutely Correct! People need to educate yourselfs and not get scammed. I reccomend http://howigotmyselfoutofdebt.org They have a lot of insightful info you can use to protect yourself. How to get out of Debt as well they have a lot of articles that can help you out.
Great stuff from you, man. Ive read your stuff before and youre just too awesome. I love what youve got here, love what youre saying and the way you say it. You make it entertaining and you still manage to keep it smart. I cant wait to read more from you. This is really a great blog.
Wow, very interesting article. It’s funny how history can be twisted in so many different ways. These photos certainly give us clues, but I guess we’ll never know the true story. . . .
Nice to be visiting your blog again, it has been months for me. Well this article that i’ve been waited for so long. I need this article to complete my assignment in the college, and it has same topic with your article. Thanks, great share.
i know this is not exactly on topic, but i have a blog using the blogengine platform as well and i’m having issues with my comments displaying. is there a setting i am forgetting? maybe you could help me out? thank you.
Thank you for the sensible critique. Me & my neighbour were preparing to do some research about that. We got a good book on that matter from our local library and most books where not as influensive as your information. I am very glad to see such information which I was searching for a long time.
I hate to sound like a nitpick, but your grammar is just…deplorable. I want to be interested in this, I really do. But it seems you spent so much time on the design (which, I will say, is amazing) that you forgot that people actually have to read your blog. Clean this up…PLEASE. It could be so much bigger if you just did some work.
This is a great site. Good clean interface and nice informative articles. I will be coming back in a bit, thanks for the great article.
I thought it was going to be some boring old post, but it really compensated for my time. I will post a link to this page on my blog. I am sure my visitors will find that very useful.
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with extra information? It is extremely useful for me.
Hi webmaster – This is by far the best looking site I’ve seen. It was completely easy to navigate and it was easy to look for the information I needed. Fantastic layout and great content! Every site should have that. Awesome job
By far the most concise and up to date information I found on this topic. Sure glad that I navigated to your page by accident. I’ll be subscribing to your feed so that I can get the latest updates. Appreciate all the information here
Thank you very much this is a very nice information!. . . . . .
You wouldn’t believe it but I have wasted all day digging for some articles about this. You’re a lifesaver, it was a great study and has helped me out to no end. Cheers,
Couldn’t be written any better. Reading this post reminds me of my old room mate! He always kept talking about this. I will forward this article to him. Pretty sure he will have a good read. Thanks for sharing!
Hrmm that was weird, my comment got eaten. Anyway I wanted to say that it’s nice to know that someone else also mentioned this as I had trouble finding the same info elsewhere. This was the first place that told me the answer. Thanks.
This is a great site. Good clean interface and nice informative articles. I will be coming back in a bit, thanks for the great article.
Perhaps you have considered adding extra video clips about automotive leak repair to your blog posts to hold the visitors further entertained? I mean I just read through the entire piece of writing of yours and it was completely pleasant but since I’m mare like a visual learner,I found that for being extra helpful well let me know how it turns out! I love what you guys are always up too. Such bright job and reporting! Continue the great works guys I’ve added you guys to my blogroll. This is a great article thanks for sharing this informative information.. I will visit your blog regularly for some latest post.
What a good blog you have here. Please update it more often. This topics is my interest. Thank you. . .
Been looking for this article for long time ago and finally found here. thanks for sharing this post. appreciate!
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with extra information? It is extremely useful for me.
You can surely see your passion in the pieces you write. The world can do with more passionate writers like you who aren’t afraid to say how they feel. Always pursue your heart.
Hello! ccdbaee interesting ccdbaee site!
Been looking for this article for long time ago and finally found here. thanks for sharing this post. appreciate!
I feel a lot more people need to read this, very good info! . . . . . .
I must say, I thought this was a pretty interesting read when it comes to this topic. Liked the material. . . . .
I had it custom designed
Hello, my group is just establishing our first website, searching and working out what is needed. This blog stuck out right away. I’m fired up about this, and adore the design of your site. Are you able to let me know what “theme” it is?
I find myself coming to your blog more and more often to the point where my visits are almost daily now!
Hey – great blog, just looking around some blogs, seems a really nice platform you are using. I’m currently using WordPress for a few of my blogs but looking to change one of them over to a platform similar to yours as a trial run. Anything in particular you would recommend about it?
I have some trouble to subscribe the rss feed, anyway I’ve bookmarked this site, is very useful and full of informations.
Your post makes one think! Great article. Thanks for allowing me to comment!
Hi i like your post the pics are awesome..thank you keep posting…
thanks, this is good idea. agreed?
Hello… I can not access your rss feed… Something trouble? Can you fix it? Thanks
Educational and entertaining. I’ve additional your internet log to my “reading substance. ” Progress me updated!. . . .
Took me awhile to read all the comments, but I really enjoyed the article. It proved to be very useful to me and I am sure to all the commenters here! It’s always nice when you can not only be informed, but also engaged! I’m sure you had fun writing this article.
Oh people that you so much in compensation your post at beneficial time. It helped me in my assignment. Thanks Alot
Advantageously, the post is actually the sweetest topic on this registry related issue. I fit in with your conclusions and will thirstily look forward to your future updates. Just saying thanks will not just be enough, for the extraordinary clarity in your writing. I will immediately grab your rss feed to stay informed of any updates.
I found your site via google thanks for the post. I will bookmark it for future reference. Thanks Stock Forums