Many people are aware that the insolvency exclusion exists.
However, the big question people have is - how do I calculate insolvency? The insolvency calculation is not that complex.
But gathering the applicable information can be a challenge.
The calculation needs to be completed as of the date just before the debt was forgiven.
So the first thing that needs to be done is to make a list of all the assets and liabilities that you have at that point in time.
Of course you may have forgotten just when you bought a certain TV or when you paid off that credit card balance.
So you need to go back and review receipts and other support that you may have.
Once you have a list make sure to review it closely to make sure that it is complete and you may want to have your spouse or another person close to you take a look at it.
Remember that you the taxpayer are responsible for the proper valuations of assets and liabilities at the insolvency date.
A professional can assist you but he or she will not know everything about your financial situation.
It is also your responsibility to determine whether any outstanding indebtedness is recourse or non-recourse debt.
This can be difficult.
You must use proper diligence in determining the amounts on the solvency calculation.
This includes proper support for the fair market valuations of assets and liabilities, which may include (but is not limited to) appraisals, independent valuations, market studies, account statements, etc.
You must retain any and all supporting documentation relating to the insolvency calculation.