Quote Quoting Taxing Matters
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The computation is done as of the day the debt is discharged. Let me give you a simple example. Joe owes his bank $20,000 on a personal loan. He settles that debt with the bank for $5,000. Thus $15,000 is discharged. Prior to the discharge, his total assets were $50,000 and his total debts (including the personal loan to the bank) were $60,000. Thus, immediately prior to the discharge, he was insolvent as his debts exceeded his assets by $10,000. Immediately after the discharge, his total assets are $45,000 and his total debts are now $40,000. So immediately after the debt, he is no longer insolvent. He is solvent by $5,000 and that $5,000 would then be taxable income as the result of the debt discharge. The remaining $10,000 of discharged debt is not included in his income, but he may have other tax adjustments to make to compensate for that.
So, would a fairly accurate shortcut for calculating taxable income that results from debt forgiveness be to say that "Your net worth immediately after the debt is forgiven, if it is above zero, becomes taxable income", if we overlook all the other tax law details you've mentioned (that I don't think apply to me anyway)?