taxes and savings bond

[dktunnel]

I have two income tax questions:

Husband and I cashed a savings bond in 2005 that was a gift. We received a 1099-int that shows the interest. Do we just pay taxes on the interest or is there a gift tax we need to pay?

The money from the savings bond was used to settle credit card debits with three creditors. We have received 1099 from two of the creditors but not the third. The debt that would be considered as income from that third one would be about $1000. Should we just count it as income even without a 1099? I have read that you don't have to pay taxes on it as income if you were insolvent, but just what IS insolvent?
We live in Pennsylvania.

Okay, that's three questions. thanks!!

 

[LdiJ]

I have two income tax questions:

Husband and I cashed a savings bond in 2005 that was a gift. We received a 1099-int that shows the interest. Do we just pay taxes on the interest or is there a gift tax we need to pay?

The money from the savings bond was used to settle credit card debits with three creditors. We have received 1099 from two of the creditors but not the third. The debt that would be considered as income from that third one would be about $1000. Should we just count it as income even without a 1099? I have read that you don't have to pay taxes on it as income if you were insolvent, but just what IS insolvent?
We live in Pennsylvania.

Okay, that's three questions. thanks!!

Yes, you simply report the 1099-int on your return. There is no gift tax involved.

You may not need to include the 1099Cs as income.

Insolvency exclusion. You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.

Exclude from your gross income debt canceled when you are insolvent, but only up to the amount by which you are insolvent. However, you must use the amount excluded to reduce certain tax attributes, as explained later under Reduction of Tax Attributes.

If you want to read the rules regarding the Reduction of Tax Attributes:

http://www.irs.gov/publications/p908/ar02.html#d0e1086