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IRS Releases New Insolvency Pub

April 29, 2009 · 16 comments

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.

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{ 12 comments… read them below or add one }

1 Karen Plummer February 19, 2010 at 3:59 pm

We are trying to fill out the insolvency worksheet for our taxes. Do we use just the interest from retirement and 401k or the total amount?? Please advise ASAP

2 Glenda February 22, 2010 at 6:19 pm

We are trying to fill out the insolvency worksheet for our taxes. Do we use just the interest from retirement and 401k or the total amount?? Please advise ASAP

3 Shawna March 1, 2010 at 3:56 pm

Hi – My husband and I just recently married in 2009. We purchase a home and we haven’t owned a home for three years. We thought we qualified for the new home owners credit of $8,000.00….. It turns out, my husbands ex-wife purchased a home in the last three years, and if he was still legally married to her (although separated) WE DON’T GET THE CREDIT!!!!!!

Please advise…….

4 Ron R. April 1, 2010 at 1:24 am

I am trying to fill out the Insolvency worksheet and in the assets section; Residences etc… Do they want the FMV of the property in default? Also, i wouldn’t know what the FMV was as I never saw a figure until I received the 1099-A…….which I was approved on a Deed in Lieu……can you help me with these questions?

Thanks,

5 jack ryka April 9, 2010 at 9:26 am

Trying to fill out the Insolvency Worksheet. What do I put in for “interest in a pension plan”. (I have NYS teachers pension of 50k/yr and SS of 18k/yr.) Thanks

6 Kelly April 10, 2010 at 4:19 pm

Jack, as I understand it, you would include the full value of a pension plan on the worksheet, but not your SS benefits. I believe this is true even if state law would otherwise protect your pension from creditors.
You do include SS as income on your tax form (though it may or may not be taxable, depending on your situation). It’s generally not considered an asset.
All of that said, I am not 100% about how SS affects an insolvency worksheet – you might want to call IRS to confirm (1.800.829.1040).

7 Peggy April 13, 2010 at 2:50 pm

On the Insolvency Worksheet Assets line 19 for Residence ect. do I put what the full assed value of our home and property is or what we have in equity? Also line 22 how is the best way to determine the value Household goods and properties?

8 Bill August 16, 2010 at 2:34 pm

Did anyone answer the question from jack ryka on interest on pension plan?

9 komputerjeanyus February 20, 2011 at 10:49 am

To calculate the household goods, use a value that you would get if you sold that item in a yard sale or if you took an item to a pawnshop. For example, I listed my cups and dishes at 25 cents a piece. I had 22 glasses and coffee mugs which was valued at $5.50. For appliances you can check out Craigslist to get a ball park idea of what the appliance is worth. I valued my 12 year old dryer at $50. I also assigned every item a condition value in my “Conditional Rating System”. I assumed “Fair” condition unless otherwise noted in my spreadsheet that I created.

Poor/Not running or working
Well Worn
Worn
Fair
Good

Most items are in what I call “fair” condition which means the average person would get use of the item still. “Good” means lightly used or recently purchased. I believe the rest are self-explanatory.

10 Cynthia July 14, 2011 at 3:11 pm

If my husband buys a home the same yr I foreclose on the old home can we still file insolvency?
We filed jointly last yr
Can we file separate this yr to avoid problems?

11 Donna July 14, 2012 at 5:50 pm

I am looking at the insolvency worksheet and am a little confused about the 401K. We are supposed to put the full value on this worksheet? What good does that do me – I can’t use it to pay the tax!

12 Bill Munson January 3, 2013 at 11:43 am

Are retirement IRA accounts considered in calculating insolvency or are they excluded?

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