Insolvency (Form 982) Estimator — Student Loan “Tax Bomb”
Educational estimate only. Insolvency is generally when total liabilities exceed the fair market value (FMV) of total assets immediately before the debt is canceled.
Tip: Bookmark this page. You will need these numbers again when you file taxes (Form 982).
Guide: How to Use the Insolvency Exclusion (Form 982)
What is the “Tax Bomb”?
When a lender cancels your debt, the IRS treats it as income. If a lender reports the cancellation, you’ll see it on Form 1099-C — that’s the number that can trigger the tax bill.
The Fix: Form 982
You can wipe out this tax bill if you were “insolvent” immediately before the cancellation. Your insolvency amount is your shield: you can exclude canceled debt up to that amount.
- Scenario A (Insolvent): You owe $100k and own $20k. You are insolvent by $80k. If $50k is forgiven, it is fully covered. Taxable: $0.
- Scenario B (Partially Insolvent): You owe $50k and own $40k. You are insolvent by $10k. If $50k is forgiven, only $10k is covered. Taxable: $40k.
- Scenario C (Solvent): You owe $50k and your total assets are $300k. You are not insolvent. Taxable: Full $50k.
Step 1: What Counts as an Asset?
For the IRS Insolvency Worksheet, you must list everything you own, even if you can’t sell it immediately.
- Real Estate: Your main home, rental properties, or land.
- Vehicles: Cars, trucks, motorcycles, and boats (current trade-in value).
- Retirement Accounts: Yes — include retirement balances like 401(k)/IRA in your asset total for the insolvency test.
- Cash & Investments: Savings, checking, stocks, crypto, and bonds.
- Personal Property: Furniture, jewelry, electronics, and collectibles.
Step 2: What Counts as a Liability?
List every debt you owed immediately before the forgiveness event.
- The Student Loan: The full balance of the loan being forgiven.
- Mortgages: Primary home loans and HELOCs.
- Vehicle Loans: Any auto financing or leases.
- Consumer Debt: Credit card balances, medical bills, and personal loans.
- Past Due Taxes: Federal or state taxes you already owed.
Fair Market Value (FMV) Tips
The IRS requires the “Fair Market Value,” not necessarily what you paid for an item.
- Homes: Use a current Zillow estimate, recent appraisal, or property tax assessment ratio.
- Cars: Use Kelley Blue Book (KBB) or Edmunds “Private Party Value.”
Frequently Asked Questions (FAQ)
Will this reduce my tax refund?
It can. Any taxable canceled amount is added to your income for that year, which can shrink your refund or increase what you owe—depending on your withholding and credits.
What if I am only “partially” insolvent?
You can exclude canceled debt up to your insolvency amount. Anything above that is the part that can be taxable
Does this apply to PSLF?
No. Public Service Loan Forgiveness (PSLF) is already federally tax-free. You do not need to file Form 982 for PSLF.
This calculator is mainly for 2026+ situations (like IDR forgiveness) where the temporary federal tax-free rule doesn’t apply.
Which tax form do I file?
If you qualify, you typically file IRS Form 982 (“Reduction of Tax Attributes”) along with your federal tax return (Form 1040).