Insolvency Worksheet (Pub. 4681): Lines 1 to 38 Explained

Updated November 7, 2026. Quick answer: The Insolvency Worksheet in Publication 4681 has three parts: total liabilities immediately before the cancellation (lines 1 to 15), the fair market value of everything you owned (lines 16 to 37, retirement accounts included), and the amount of insolvency, line 37 subtracted from line 15 (line 38). You can exclude canceled debt only up to the amount of insolvency, reported on Form 982 line 1b.

What the worksheet is for

“Don’t include a canceled debt in income to the extent that you were insolvent immediately before the cancellation.” “You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation.” “You can use the Insolvency Worksheet to help calculate the extent that you were insolvent immediately before the cancellation.” The worksheet is headed “Keep for Your Records”.

What counts as an asset and a liability

Assets are broad: “For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets, which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account).” For liabilities the publication lists three kinds: the entire amount of recourse debt; the amount of nonrecourse debt up to the fair market value of the property that secures it; and the amount of nonrecourse debt above that value, to the extent it is forgiven.

Part I: liabilities, lines 1 to 15

Part I of the worksheet lists the liabilities immediately before the cancellation and says not to include the same liability in more than one category. The lines are:

Part II: assets, lines 16 to 37

The assets are valued at fair market value immediately before the cancellation, and the same asset is not counted twice.

Part III: the amount of insolvency, line 38

“Amount of insolvency. Subtract line 37 from line 15. If zero or less, you aren’t insolvent.” For what you can exclude, the publication says to enter on line 2 of Form 982 the “smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellation.” That goes on Form 982: “To show that you are excluding canceled debt from income under the insolvency exclusion, attach Form 982 to your federal income tax return and check the box on line 1b.” See Form 982 Part I and Part II.

The IRS examples, recomputed

Publication 4681 works three examples with a $5,000 canceled credit card debt. In the first, liabilities were $15,000 and assets $7,000, so the insolvency is 15,000 minus 7,000, or $8,000, more than the debt, and “you can exclude the entire $5,000 canceled debt from income.” In the second, liabilities were $10,000, so the insolvency is 10,000 minus 7,000, or $3,000, and “Additionally, you must include $2,000 of canceled debt on Schedule 1 (Form 1040), line 8c (unless another exclusion applies).” In the third, a joint $10,000 debt is split 75% and 25%: your share is 10,000 times 75%, or $7,500, you were insolvent to the extent of $5,000 (15,000 minus 10,000), and the $2,500 left over (7,500 minus 5,000) is included on Schedule 1, line 8c, unless another exclusion applies.

Illustration with invented numbers

Illustration, not an IRS example, computed from invented inputs: a $12,000 credit card debt is canceled, and the worksheet shows these amounts immediately before the cancellation. Total liabilities are $44,000 (computed), total assets are $27,000 (computed), so line 38 is $17,000 (computed, $44,000 minus $27,000). The amount that can be excluded is the smaller of $12,000 and $17,000, which is $12,000 (computed), and $0 (computed) would be left to include unless another exclusion applies. Note the retirement account is counted as an asset, as the publication requires.

Edition

This page reads Publication 4681 for 2025 returns and the Instructions for Form 982 (Rev. December 2021), both files irs.gov served on November 7, 2026 (sha256 in the kit data). The worksheet lines are the IRS’s; the invented amounts in the illustration are not. Check the IRS page for Publication 4681 for anything enacted after the file was published.

Common mistakes

• Leaving a retirement account or pension out of the assets because creditors cannot reach it. The publication counts exempt assets.
• Counting a liability twice, such as past-due mortgage interest inside both the mortgage line and line 6.
• Using today’s balances. The worksheet is as of immediately before the cancellation.
• Excluding more than the insolvency. Line 2 is the smaller of the canceled debt and the amount of insolvency.

Related: Form 1099-C boxes explained, and Publication 525.

Sources

• Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (2025 returns): https://www.irs.gov/pub/irs-pdf/p4681.pdf
• Instructions for Form 982 (Rev. December 2021): https://www.irs.gov/pub/irs-pdf/i982.pdf

Read from the IRS documents linked above on November 7, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.