How to Calculate Retirement Assets for Insolvency

by C. Taylor

Your retirement years should be a relaxing and leisurely time, but unfortunately, taxes will still be a concern. If a commercial lender forgives your debt, such as a credit card or mortgage debt, the amount forgiven is considered taxable income, which means the Internal Revenue Service expects its cut. However, this amount is exempt from taxation to the extent that you are insolvent, which simply means your debts exceed your assets. Debts are generally well documented and easy to quantify, but calculating assets for insolvency is more complicated. Generally, your retirement assets include the total amount you would receive if you liquidated everything you own.

1. Add up all cash balances from checking, savings and investment accounts. If you have a stockpile of cash stored in your mattress, include that as well. Money owed to you is also included, such as money lent to a friend or a security deposit on a rental home.

2. Add the fair market value off all investments to your total cash calculated above. Your investments include stocks, bonds, annuities and business interests. The fair market value is the current value of the investment just before a debt was forgiven.

3. Total the fair market value of any properties you own and add to the previous amount. This includes your primary residence, rental properties, vacation homes and undeveloped land. If you still owe on a mortgage, do not subtract the outstanding balance – the debts associated with your assets are already included in your total debt calculation.

4. Add up the fair market value of any vehicles, such as cars, boats and motorcycles, to the previous total. Consult a buyer's guide to help assess current valuations.

5. Add the fair market value of any personal belongings to your total. This includes computers, tools, jewelry, collectibles, books, furnishings, appliances, sports equipment and firearms. All possessions that have a non-zero value must be included. The fair market value for such items is the amount you can reasonably expect to receive if you sold the items at auction or to a random buyer.

6. Subtract your total assets from your total debt. The difference is the amount of your insolvency. Debt forgiven up to this amount is not taxable. As an example, if you had $20,000 in debt and $15,000 in assets, you are $5,000 insolvent. If a $7,000 debt was forgiven, subtract the insolvency amount. Doing so leaves you with $2,000 in taxable income from the forgiven debt.

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