There's a spreadsheet in publication 4681 to calculate the amount of debt forgiveness income you can exclude from form 1040 reporting. It's basically a balance sheet, and calculates the amount of your insolvency (excess of liabilities over assets). This is the maximum amount by which you can offset the cancellation of debt income shown on the 1099.If you were insolvent by at least $1000 when your $1000 debt was discharged, you put $1000 on line 2 of form 982 and zero on line 21 of form 1040. If your liabilities were not at least $1000 more than your assets when the debt was forgiven, you put the amount of your insolvency on line 2, and you would put the excess of the amount forgiven over the amount of your insolvency on line 21 of Form 1040. In other words, in the unlikely event you were only underwater by $750 but managed to get your lender to forgive $1000 of cc debt, you'd put $750 on line 2 of form 982 and $250 on line 21 of form 1040.You don't have to attach the insolvency calculation/spreadsheet to your tax return with Form 982, but you may want to have it in your tax files. You can check with your accountant about what other records you might want to keep in case, on audit, you are asked to prove insolvency of at least the amount excluded.
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