Taxpayers must complete Form 982 and attach it to their tax return for the tax year in which the debt cancellation occurred. The form requires detailed information on the type of debt, the fair market value of any property received in exchange for the cancellation of debt, and the total amount of debt discharged. Failure to complete the form correctly could result in the IRS treating the canceled debt as taxable income, leading to unexpected tax bills and penalties.
You can obtain IRS Form 982, also known as the Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), on the IRS website or on this page. The form is available for download as a PDF file, which you can print and complete manually or fill out electronically using tax software or online tax tools.
Alternatively, you can also obtain the form by visiting your local IRS office, where they can provide you with a hard copy or help you complete the form. It’s important to note that not all IRS offices provide in-person assistance, so it’s best to check beforehand.
When completing Form 982, be sure to accurately report all information related to your canceled or discharged debt, including the fair market value of your assets and liabilities, the amount of the canceled debt, and any available exclusions or deductions.
The insolvency exclusion allows you to exclude canceled debt from your taxable income up to the amount of your insolvency.
To determine if you qualify for the exclusion, you need to calculate your insolvency at the time your debt was forgiven or canceled. This means adding up the total fair market value of all your assets and liabilities and subtracting your liabilities from your assets. If the resulting number is negative, you were likely insolvent at the time of the debt cancellation.
The insolvency exclusion is available to taxpayers who meet specific circumstances such as being insolvent at the time of the debt cancellation or having the debt canceled in a Title 11 bankruptcy case. Other criteria include certain types of farm indebtedness, qualified principal residence indebtedness, and business debt.
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