Cancellation of Debt Form 1099-C for a deceased spouse

[PPECPA]

Here's a good question, I think I know the answer but would like the communities thoughts.  I have a client who's husband passed away in 2021.  For the 2021 tax year, the spouse filed a MFJ return as the surviving spouse is  considered legally married for the year (did not remarry in the same year).

Now, for the 2022 tax year, the surviving spouse is filing head of household (not married) as she maintains a household for her and her mother.

For the 2022 tax year the client received three (3) Form 1099-Cs for her late husband.  All 1099-C's report a "date of identifiable event" of either August 31, 2022 or September 1, 2022.  The 1099-C's are in the late husbands name and no where on the forms is the surviving spouse named.  As I understand this from the client, these charge accounts were in the husbands name only, not the wifes.  Soc. Sec. number on the Form 1099-Cs' is only the late husbands.  

Now we are all caught up.  

Does the surviving spouse have to report the Cancellation of debt as income on her tax return for the 2022 year?

My thought initially is NO she does not as the return I am preparing for her is a HOH return and no where on the return is her late husband shown, in short I have nothing to attach this income to.

Am I correct in this?

Any thoughts would be greatly appreciated

PPECPA

[IRonMaN]

The attachment you are looking for would be a 1041.  Were there any assets left in the estate after death?

[BobKamman]

Don't fall down the rabbit hole of believing we have a tax on pieces of paper, not on income which includes cancellation of debt.  The question you should ask is whether she was liable for her husband's debt, under state law - for example, she acquired that $10 million home through joint tenancy and the $100,000 in Krugerrands because they were in the house safe.  Most of the time, widows are not liable for their late husband's separate debts.  But sometimes they are, whether a piece of paper is involved or not.  

[PPECPA]

Thanks for the follow up.  Kruggerrands?  Really?  You've been watching Lethal Weapon II haven't you.

But I digress.  

No estate or trust was established and the assets/liabilities of the late husband did not go through probate.  

I've looked this up as best I can and all I could find was posts similar to this one here at Lacerte.  But of the posts I've looked at, they seem to agree that the this is not reportable by the wife as the return will be in her name and not the husbands.  Had these 1099-Cs been received in the same year of his death then yes things might be different.  But as this is now, the debt was in his name only and the client/wife is not filing a MFJ return.

Would I be wrong not to report the this as income on the 2022 tax return?

PPECPA

[sjrcpa]

"No estate or trust was established and the assets/liabilities of the late husband did not go through probate. "

That means nothing.

As Jeff said, it is income to the estate of the decedent and may or may not be taxable. Form 1041.

[BobKamman]

It might very well belong on her 1040 if she was personally liable for the debt.  Don't drag a 1041 red herring over the rabbit hole.  

[PPECPA]

Means nothing?  Ok

So this May or may not be taxable.  Ok how do I know if it is or is not?

That's my question?  

[sjrcpa]

First, as Bob said, find out if she is/was liable for it.

If she's not, then it's his estate's income. It's not taxable if the estate was insolvent, to the extent of the insolvency. Otherwise it is.

[PPECPA]

How can his be taxable to her if the 1099 - C names the late husband and not her?  The account was not a jointly owned account and again, his name is will not be on the return for 2022.  

The canceled debt is typically considered income.   I get that.  This is different.

Considering her husband passed away in 2021,  and she does not file a joint return this year 2022, then there is not a return to add the income unless there was an estate opened.  Again, no estate was opened.  If there was no estate or probate opened or the estate was closed, then there is nothing we can add it to.

If she was/is named on the 1099-C as a joint recipient of the canceled debt, then yes we include it on the return.  But that's not the case here.

Is this reportable on the her tax return for 2022?

[BobKamman]

It can be taxable to her if she was liable for the debt and did not pay it.  Whether she was liable for the debt is a question of state law.  Do they have lawyers over there where you are?  Did she ever consult with one about the questions that many widows have?  

If you want to try your hand at the unlicensed practice of law, you won't be the first tax practitioner to operate that way.  If you want to speculate on how she would be caught if it's taxable and she doesn't report it, that's also a common practice, although not really appropriate for message boards.  

Have you figured out what happened in 2022, a year after the husband's death, to make the banks stop trying to collect it?  Did they ever call her?  Did she ever call them?  And you're just taking her word for it, right, that it was his separate account and she never used it for expensive jewelry or dinner dates with friends?  

[cpataxpromesa]

There's the legal perspective that all these people are trying to advise on, and then there's the practical perspective.  If the 1099-C forms are issued in the late husband's SSN and NOT your client's, then the IRS will have no way to match that potential income to your client's 2022 tax return.  The IRS knows the man is deceased because you indicated on the 2021 return, hopefully, so at best they would be looking for the income on a 1041 estate, but they are so far backed up, I doubt they will be after you or the client for this income, even considering the 80k new agents they are supposed to be hiring.

So from a practical perspective, I think you're okay with not reporting the income on her 2022 Form 1040.  If the IRS sends her a notice, you can explain it was a debt of the deceased husband and then file a 1041.  And maybe the 1041 will show some of it is nontaxable like someone said, due to the insolvency of the estate.

[sjrcpa]

" Again, no estate was opened.  If there was no estate or probate opened or the estate was closed, then there is nothing we can add it to."

That has nothing to do with income tax.

Maybe the estate should have been probated. Maybe not. That is a legal question.

[PPECPA]

Got it!  The estate has nothing to do with the cancellation of debt being taxed on the wife's taxes.  

So, is this or is this not reportable as income on the wife's tax return?

[qbteachmt]

This is the part that resonates with me: "No estate or trust was established and the assets/liabilities of the late husband did not go through probate."

So, there were assets? Where did that go? What are they?

The point is that the value of this person's life at the date of death, stands good for the liabilities. You cannot state there is nothing to report, if there was a car which had an auto loan, for example. The write off of the car loan doesn't give the surviving spouse a free car.

[PPECPA]

Hey Promesa

I am in agreement with your comments.  This is really the only response that to me makes practical sense.  

Much thanks

PPECPA out!

[IRonMaN]

Really?

[qbteachmt]

Ha ha ha ha ha... Boy, does this make my day.

[Husker]

I am interested in this question.  My husband passed away early in 2022.  I filed for 2021and 2022 as MJ.  This year for 2023 I will file single.  He was primary on credit card debt.  I received several letters from them stating I was NOT responsible for the debt.  Everything we owned was joint, therefore there was no estate or probate.  I have received a 1099-C with his name and Social Security number on it.  I am not listed.  Wondering what I am supposed to do with it!

[qbteachmt]

@Husker

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Thanks.

[PPECPA]

Hi Husker

My apologies for not getting back to you sooner.  Been out of town for the better part of a week.  yes I recall this issue.  I researched this through IRS publications and asked around here and came up with what I thought was a solution.  

Short story is, do not report the 1099 Cancellation of debt on your taxes period.  Absent a trust or will, if the debt was in the deceased spouse name and his/her name only then do not report this on your taxes.   The IRS would typically track this by the persons' social security number and then look for that 1099 to be reported on the taxpayers return.  But if you are now filing single and your late spouses social security number is not reported on your return, then do not report.  

Had these 1099-Cs been received in the same year of spouses death then yes things might be different.  But as this is now, if the debt was in his name only and if the client/wife is not filing a MFJ return then all bets are off.  Do not report.

Best of luck

[DVF]

Happy 1 month after tax season survival.

I have a client that passed away on 7.9.23. She received 3 1099-Cs all with dates in 2023 after DOD. Her husband was not on the credit cards, therefore not responsible for the debt. I see all the discussions about receiving the 1099-C the following year and just a note about if the 1099-C was in the same year, it would be different. I have searched and I cannot find an answer. There is no estate, no probate as everything went to the husband. The husband is planning to file MFJ, but I wonder if it would be better to file MFS for 2023 not include it and when the IRS questions, we have the dates on the 1099-C showing discharged after DOD.

Side note - the savings between MFJ and MFS is $1 if I include the 1099-C. Of course it would be more if I take the 1099-Cs off on the MFS return if that is determined the best way to go.

Thank you in advance.

[BobKamman]

@DVF "Her husband was not on the credit cards, therefore not responsible for the debt."

Maybe not responsible as a co-signer, but maybe responsible as the beneficiary of assets acquired through joint tenancy or beneficiary designation.  The tax is on any canceled debt, not on a piece of paper.  But if you're sure he's not liable, and the tax difference between MFJ and MFS is only $1, then why would he want to file a joint return?

Not really enough facts here.  You're not in a community-property state, are you? You might want to review this article:

" Joint ownership doesn’t always mean full protection from creditors, especially when only one owner owes a debt. The answer to this concern, varies with factors like the type of joint ownership, state laws, and specific circumstances of the debt. In this article, we’ll explore how creditors may affect jointly owned property and what it could mean for you."

https://www.oflaherty-law.com/learn-about-law/can-a-creditor-file-a-claim-against-a-deceased-persons... 

[qbteachmt]

This seems to be the often misused phrase: "There is no estate"

If the person had any ownership or financial responsibility, then of course there is an estate. What is being stated is that nothing was done about the estate. That's a legal issue. It depends on if there was a will, any trust, how assets and debt are titled, if this is a common law or community property State, etc.

"no probate as everything went to the husband."

This statement doesn't state what went to the husband nor how it went to the husband. That doesn't absolve a person of responsibility to address any mess left behind by the deceased. What it clearly identifies is that something existed, since it "went" to the husband. It doesn't go to the husband without consideration of prior claims.

"The husband is planning to file MFJ, but I wonder if it would be better to file MFS for 2023 not include it and when the IRS questions, we have the dates on the 1099-C showing discharged after DOD."

Why is no one who is asking on this topic, telling us about the legal consultation? And no one has mentioned that the taxpayer died insolvent. It's like you all are hiding more facts that are not to the taxpayer's advantage.

Every tax question is being answered with: Find out the legal conditions, first.

[DVF]

Thank you I will definitely read.

[DVF]

Thank you I see that this is more complex than originally determined

[BobKamman]

To add to the point made by @qbteachmt , "estate" in the context of federal estate taxes means all sorts of things beyond probate estate:  joint tenancy; beneficiary designation; even "power of appointment," which the average dead person probably could not define.  

But since @joshuabarksatlcs has mentioned it in another thread, let me give some examples from my own practice of people who weren't supposed to have a probate estate, but actually did. 

MM died in 2020.  Her parents had died by 2000, but her brother (who had substance-abuse problems) continued to live in their house.  He managed to pay the insurance and taxes from Social Security or other welfare.  So the house was never probated.  When the brother died in 2022, a surviving brother finally got around to taking care of the parents' estates.  All of MM's property went by joint tenancy to her husband, but her share of her parents' estate could not.   There were no debts, but they would not be owed by her estate anyway, because more than two years had passed since her death. Probate was opened in 2023 and will be closed maybe this week, when I get around to preparing the closing statement.

John's mother died in 1990, leaving a trust for his benefit.  He was a paranoid schizophrenic, and disappeared.  The trust said that at his death, the trust would be distributed to his three aunts (sisters of his mother).  John died in 2015, but the trustee did not discover this until 2023.  All three contingent beneficiaries had died since 2015.  So now they have estates, and their survivors collect their share.  Fortunately, the amounts are low enough that it can be done by affidavit, not in a court proceeding. Once we find all of them.  

Then there was Vi, who had a great-aunt in West Virginia she never met.  The great-aunt owned some land that happened to have some valuable mineral rights.  By the time the West Virginia (intestate) estate was settled, Vi had died, so her share went to her estate.  Fortunately there was already a probate estate opened for her, so the personal representative (her son) collected the $100K. 

Next time someone says "there was no estate," you might want to point out "maybe there will be."

[joshuabarksatlcs]

@BobKamman 

First off, Bravo!!

This is just a Joe-Six-Pack-ish comment, and definitely not a legal one, but an average dead person likely can't define anything...

[qbteachmt]

Oh, I've got a bunch of those stories, too.

The widow who was updating a family trust in anticipating of selling the primary residence, and as that got wrapped up, the attorney asked about "the other trust." Uh, what other trust? Turns out the one daughter "X" from her husband's first marriage, who was specifically named as excluded in the first trust, is the sole beneficiary of a different trust. There were 6 children from that first marriage, and a few of those adult-children kept asking about "X's trust" and the widow had no idea it even existed. It was never funded, as far as we could find. The widow is not the trustee of X's trust, so she walked away from that family's problems.

That lady had previously helped with a brother-in-law's estate. I had recommended not disbursing everything to the family right away, even though the family was clamoring for it even as he was being buried. It took 3 years to deal with loose ends, and even though they have a bank in the family and had approached every regional bank to try to find unknown accounts, about 6 years later a couple of earnings checks showed up in the mail payable to the deceased.