ANSWER
Each spouse will be responsiblE for one-half of the canceled
debt, and they will each complete an Insolvency Worksheet with all
of their separate liabilities and assets only.
They may choose to file married filing separately, as this may
provide a greater reduction of canceled debt income.
A single Insolvency Worksheet can be completed showing all of
their liabilities and assets.
Each spouse will be responsible for one-half of the canceled
debt, and they will each complete an Insolvency Worksheet with
one-half of their joint liabilities and assets.
- Is the debt that was cancelled owed by both spouses? If so,
both spouses’ assets must be considered for the insolvency test.
Jointly owned assets must always be considered in the insolvency
test.
- If the debt is not jointly owned, only the assets that are
jointly owned and/or separately owned by the debtor are included in
the insolvency calculation. For example, if the debt forgiven is on
a rental property owned by only one spouse, only that spouse’s
solvency is relevant, not both spouses’.
- Married Filing Jointly does not impact the insolvency
calculation and any credits that would be disallowed by filing
separately may be retained, so there is no need to file a separate
tax return in the event that you would otherwise elect to file a
joint return.