How I understood the insolvency worksheet, is that if my liabilities exceeded my assets, I was insolvent. ====>>In principle correct;in general, as your debt is forgiven meaning it has been canceled through a debt settlement, it's possible you, as a debtor , need to report the forgiven debt as taxable income. Aslongas the forgiven amount is more than $600, it must be reported as taxable income on your 1040 as other income or Sch C or etc. However, if the forgiven debt has been discharged through bankruptcy or you are insolvent, then you do not need to report the forgiven debt as your taxable income on your return. You will need to total up all of your assets and liabilities to determine if you are insolvent; you need to make a list of all of your assets such as stocks, bonds, bank acct.i.e., checking / savings account balances, 401Ks, IRAs, CDs, jewelry, computers, home furnishings, automobiles and other assets. When your list is complete, then you need to accurately assign a fair market value to each item by verifying that all of your assets are listed and correctly valued. And then you should add up the fair market value for each item on your list to arrive at a total. The assets on your list must be those you owned on the cancellation date shown on your 1099-C form.you also need to make a list of every debt you owe, including your mortgage, auto loans, credit cards, lines of credit, home equity loans, tuition and educational loans. And you should total up your debts and write down the amount of your liabilities by including everyone you owe on this list. You also need to compare your total assets and your total liabilities. If your liabilities exceed your assets, you are insolvent and you don't have to report your forgiven debt as taxable income on line 21 of your 1040 tax return.
You should prepare Form 982 and attach it to your tax return. This is how you notify the IRS that you are insolvent. You will need to attach some paperwork confirming that you are insolvent. It would be wise to get help from a tax professional. Or you may, call the IRS as you are filling out Form 982 and they may be able to walk you through the steps to get it completed. You can ONLY exclude cancelled debt from your gross income up to the amount by which you are insolvent. Depending on the amount of your cancelled debt you are excluding, you can expect to be audited.
I believed I met this criteria, but now that I've filed (Got an extension, wasn't able to file by April due to New baby, just didnt have time to wrap my head around it all) I am not so sure, and think I should file an amended return and catch my mistake before the IRS lol. ===========>>It is up to you if you file 1040X;unless you filed your original return already, your return is not an amended return. basically, any time your tax information changes after you have filed a tax return, you need to file1040x to correct the information . You must have a copy of the original tax return when filing the amended return, because you will need to record the original filing information on the amended form in one column and write the updated information in another. as said above, depending on the amount of your cancelled debt you are excluding, you can expect to be audited.
I am not sure I understand assets. My Primary residence is underwater by 20,000 and I have no cash and no other assets. I'm actually in the process of filing chapter 7 bankruptcy due to loss of income, in my mind I am very much insolvent. =====>>bankruptcy os not an insolvent; if you discharged a debt through bankruptcy, you should not receive a Form 1099-C for your forgiven debt. If you receive a 1099-C for the discharged debt, you need to contact the lender and let it know. It may send you an updated 1099-C reflecting that the original form is void. You should save a copy of the original form sent to you with your bankruptcy discharge paperwork to prove that you should not have received the form in case you are questioned by the IRS about a failure to claim the income.as said, if you owe more in debts than you own in assets, you are insolvent by definition. If you receive a 1099-C after filing taxes and you are insolvent, you probably do not owe any additional taxes on that amount. You must file form 982 along with the amended return to verify your insolvency and show that no tax is due on the income shown on the 1099-C form. You need to use this same form if debt was forgiven on your primary residence to show that no taxes are due on this amount as well, but you do not need to prove insolvency in this case.
Can someone explain the liabilities vs asset? =========> in general, a liability is defined as something you owe to someone else. You do not owe the house to the seller, nor do you owe the house to the bank. You may owe the balance of your mortgage.
Is my underwater mortgaged property considered an asset?===========>>>>>> your underwater mortgaged home is an asset and outstanding mortgage principal is a liability that you need to pay back to your lender; the underwater mortged house, in your possession, is classified as an asset. An asset is something you own. A house has a value. Whether you assign the value as the price at which you purchased the house or the price at which you believe you can sell the house, that amount is how much your house is worth . You may offset the value of the home with the value of the mortgage, your liability. Your house, an asset, subtracted by your remaining mortgage, your liability, results in your wealth due to your house. That’s commonly called your equity if house fmv> your remaining mortgage, liaiblity