Question

In: Accounting

when canceled debt is jointly held by both spouse:

when canceled debt is jointly held by both spouse:

Solutions

Expert Solution

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.

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