It is becoming common to experience debt relief in these challenging times. Debt relief is usually taxable if not relieved through bankruptcy proceedings. However, canceled debt is not included in income to the extent that you are insolvent immediately before the cancellation. You are insolvent if all of your liabilities exceed the fair market value of all of your assets.
Because of the difficulty in determining insolvency, the IRS has developed a comprehensive insolvency worksheet. It can be found in the newly revised edition of Publica-tion 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). The result can then be used to determine whether and to what extent your canceled debts are excluded from gross income.