What this line means
Check this box if you were insolvent when your debt was canceled and you were not in a Title 11 bankruptcy case. Insolvent means your total liabilities exceeded the fair market value of your total assets immediately before the cancellation. The exclusion is limited to the amount by which you were insolvent — you cannot exclude more than that gap.
Does this apply to you?
- You received a Form 1099-C for canceled debt and were not in bankruptcy at the time
- Your total debts exceeded the fair market value of everything you owned right before the cancellation
- You settled a credit card balance, medical bill, or other debt for less than the full amount owed
- You want to exclude some or all of the canceled debt from your taxable income based on your financial position
Easy to overlook
You must calculate insolvency using fair market value, not book value or original cost List every asset at what it would sell for on the open market — not what you paid for it or what your bank statement shows. Your home equity is the FMV of the house minus mortgages. Include retirement accounts, vehicles, and personal property. Many filers undercount assets and overstate their insolvency, which draws IRS scrutiny. 1 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
The exclusion stops at the insolvency amount, not the total canceled debt If you were insolvent by $15,000 but had $25,000 of debt canceled, you can only exclude $15,000. The remaining $10,000 is taxable income reported on your return. Filers who exclude the entire 1099-C amount without doing the insolvency calculation receive CP2000 notices for the difference. 2 IRS Form 982 Instructions — Line 1b
Watch out for this
Forgetting to include all liabilities in your insolvency worksheet. Your total liabilities include the debt that was just canceled, plus credit cards, mortgages, car loans, student loans, medical bills, and personal loans. The IRS insolvency worksheet in Publication 4681 walks through both sides of the calculation. Understating liabilities shrinks your exclusion and increases your tax bill unnecessarily.
Footnotes
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Insolvency Worksheet. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩
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IRS Form 982 Instructions, Line 1b. https://www.irs.gov/instructions/i982 ↩