A 1099-C Cancellation of Debt for a deceased spouse

[PaulaB]

A client's husband died in December, 2017.  In 2020 she received a 1099-C for the Cancellation of a credit card debt in her husband's name.  The Code on the 1099-C is G, indicating the cancellation was due to a policy to discontinue collection.  It seems unreasonable for the spouse to be responsible for tax on the sum forgiven.  The client has very limited financial resources.  Has anyone experience to share?  

Paula

[Camp1040 · Accepted solution]

Not her name or SSN, and it doesn't sound like their was an estate tax return to amend, depending on the amount.

I would not claim it on your clients return, it is not her cancelled debt income.

[PATAX]

Yeah I have an experience to share... Years ago a client's wife died... He asked me what he should do about her credit card debt... I told him to do the right thing and pay that debt off in full... Maybe that is what your client should have done and there would have never been a 1099-C, but that is just my opinion...

[BobKamman]

That was back in the days when tax season ended April 15 and preparers had to find something else to do the rest of the year.  Some of them went into preaching. 

If the widow owed the money, the creditor would have been legally obligated to send her a 1099-C also.  Don't get them in trouble by claiming they broke the tax law.  

[Camp1040]

Agree, it is the right thing to do, but unfortunately some spouses have credit cards and spending habits the other spouse is not aware of....but I may be reading too much into the post.

[PATAX]

@BobKamman for your information I do not stop working on April 15th because I have plenty of work throughout the whole year... Second of all no one said that any tax law was broken so get your facts straight...

[PaulaB]

I'm not making moral or ethical judgment on this -- I just want to provide advice which is as accurate and reliable as possible.  The debt was the husband's, in his name with his social security number.  The creditor is a big bank with resources to pursue the debtor.  In my mind, the creditor had two years (2018 & 2019) to collect the debt from the spouse if there were any grounds upon which they could enforce collection.  Therefore, the bank may not have been justified to enforce a collection, or didn't want to spend the time and money to collect the debt.  In any event, the bank filed the necessary paperwork causing this question.  I have worked as a court clerk in Surrogate's and saw many creditors walk away from similar situations.  I thought some tax preparer might have a more defined answer than mine.

I appreciate the thoughts of all.  Paula

[qbteachmt]

"In my mind, the creditor had two years (2018 & 2019) to collect the debt from the spouse if there were any grounds upon which they could enforce collection."

You can check on the statute of limitations for this State of residence:

https://wallethub.com/edu/cc/statute-of-limitations-for-credit-card-debt/25602

You might find that spouse is Lucky and is getting off easy.

"It seems unreasonable for the spouse to be responsible for tax on the sum forgiven. The client has very limited financial resources. Has anyone experience to share?"

Well, let's do one example:

She learns the husband had a hidden credit card account with a $10,000 balance, when he died.

"The debt was the husband's, in his name with his social security number."

Either that is or isn't considered hers, too, according to the laws that apply in their State and the card application and facts and circumstances. So, could she have paid it with funds at the time of death or not? If not, she would approach the card issuing company about settlement, often pennies on the dollar, at that time.

It's hard to believe she had no knowledge of this all this time. They attempt to locate and to get paid and they file notifications to addresses, as well.

Now she can't afford to pay it, and has to pay taxes on the total forgiven. But that is, once again, pennies on the dollar. I would consider this lucky.

[BobKamman]

There is the statute of limitations, and then there is the time for creditors to present claims if a probate is started, or if the trustee of a living trust uses "notice to creditors" procedures available in some states.  Both of those timelines raise the issue of when the debt became uncollectible.  Looks like it would have been 2018 at the earliest, so the tax statute has not expired.  But that doesn't mean 2018 income should be reported on a 2020 return, just because of some piece of paper.  

[qbteachmt]

Well, nothing here tells us how long the card provider attempted to collect from the husband while he was alive. There is no info that tells us this default is the result of the death. But I would rather pay taxes on forgiven debt than have to pay off a debt in full, given only those two choices.

[PaulaB]

Thanks for your additional insight.  It was good to get so much feedback on this topic.   Paula

[Skylane]

@PATAX  A lot depends on the circumstance. I.e. If there was a will, most direct that debts be paid before assets distributed. Each situation stands on its own merit. 

if a decedent passes without assets, the personal debt would not be the obligation of the heirs.

@PaulaB 
The debt has been written off by the creditor. If there was an estate with assets that have been distributed, the IRS could have recourse against the estate. If a 1041 was filed, The decedents SSN is tied to the estate TIN. 

[BobKamman]

Actually, a will that directs debts to be paid is considered unprofessional because that's what the law requires anyway, except for secured debts, and the decedent probably didn't mean to pay off the mortgage before giving it to one of the kids.  But 100 years ago you would find that language.