The IRS has updated Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). I know, you’re thinking “So what?”
Well, the “So what?” is the updated worksheet for determining insolvency, found on page 6 of the Pub (and at the bottom of this post). The worksheet is a handy resource for taxpayers who have been trying to determine whether and to what extent their canceled debts are excluded from gross income.
You see, canceled debt (like credit card debt after it is forgiven) is reportable – and taxable – as income to the IRS unless you meet an exception. Insolvency is one of those exceptions. The definition of insolvency is debt that exceeds your assets. But many taxpayers find that difficult to quantify. So the IRS has a handy worksheet to help you figure it out. To view the insolvency worksheet as a pdf, click here.