Credit Cards written off after death of tax payer. How to treat?

[Hamacher]

I have a client that called me with a question that I am not certain how to answer. His Mother passed away and had a number of credit cards that were written off after her death. Other than her house, she really doesn't have any assets. How does the debt relief get treated for tax purposes?

[Burke]

Did the Mother receive 1099-C's for 2012 in her SS#? What was her DOD? Is her estate still open? Is a final tax return 1040 being filed for her? "Written off" and a 1099-C means they are no longer trying to collect the debt.

[Hamacher]

Follow up

Did the Mother receive 1099-C's for 2012 in her SS#? What was her DOD? Is her estate still open? Is a final tax return 1040 being filed for her? "Written off" and a 1099-C means they are no longer trying to collect the debt.

She passed away in 2012 and has received some 1099-C in her SS#. I believe an Estate was never opened because their were not enough assets.

[Koss]

Income in respect of the decedent?

Well, maybe. Or maybe not.

Those are difficult cases.

If there is no estate, I'm not sure that anyone can be held responsible.

How much money is involved?

The IRS will be chasing a ghost.

I would never advise a client not to report income, or not to file a return, if in fact such reporting is required. At the risk of stating the obvious, that would be unethical.

I'm making a more subtle point here. The decedent is not your client. And based on the individual facts and circumstances, your client may have no obligation with respect to the information returns addressed to the decedent.

I'm not really answering the question of how the income should be reported, or whether it needs to be reported at all. I'm raising a different question: Is your client responsible for the reporting?

BMK

[Koss]

Original Question

If the taxpayer died in 2012, and the debt was cancelled in 2012, then at least in theory, the cancelled debt would have to be reported on the final return of the decedent, i.e., the decedent's Form 1040 for 2012.

If the decedent was insolvent at the time the debt was cancelled, then it is not taxable income. You would need to do a Form 982.

BMK

[Koss]

Final Return of the Decedent

I have often thought that I would like to have my gravestone inscribed as follows:

Burton M. Koss has filed his final return

... and leave instructions that the setting of the stone should take place on April 15 or October 15 in the year following my demise.

BMK

[Hamacher]

If the taxpayer died in 2012, and the debt was cancelled in 2012, then at least in theory, the cancelled debt would have to be reported on the final return of the decedent, i.e., the decedent's Form 1040 for 2012.

If the decedent was insolvent at the time the debt was cancelled, then it is not taxable income. You would need to do a Form 982.

BMK

This raises another question... is she insolvent? The only asset she had was her house which does have equity (as much as $100,000) but has not yet been sold. The credit card debt is near $50,000. Other than the debt relief, I do not even think she would have a filing requirment.

[Lion]

I have often thought that I would like to have my gravestone inscribed as follows:

Burton M. Koss has filed his final return

... and leave instructions that the setting of the stone should take place on April 15 or October 15 in the year following my demise.

BMK

Love it, Burton!

My son called me a couple of years ago during tax season after I'd emailed him some questions for his return that I was preparing free: "Mom, this is the last time my girlfriend and I are filing single."

[Burke]

If the taxpayer died in 2012, and the debt was cancelled in 2012, then at least in theory, the cancelled debt would have to be reported on the final return of the decedent, i.e., the decedent's Form 1040 for 2012.
If the decedent was insolvent at the time the debt was cancelled, then it is not taxable income. You would need to do a Form 982.
BMK

I am thinking the whole thing hinges on when the debt was cancelled. If it was cancelled prior to her death in 2012, then surely it is reported on her final tax return. But she has a short tax year for 2012 unless she died 12/31/12. Items that occur after the DOD are properly attributable to the estate. If it was cancelled after she died, then that is another matter. The CC company had the right to file a claim against her estate. Did they? And just because "an estate was not opened," does not mean there is no estate. OP states she had a house. Unless it was owned jointly with another person, then she has an estate. The house is its asset and whatever monies might have been in her sole name in banks, etc. It might not need to be probated, but its still there.

[Koss]

Cancellation of Debt

Burke has a good point. If the debt was not cancelled until after she died, then the income from the cancellation belongs to the estate.

Was the estate insolvent?

Under state law, there was an estate of the decedent, even if it was not required to go through probate court, and even if no estate tax return was ever filed. The estate is a legal entity that comes into existence upon the death. An estate tax return may not be required, and the estate may be exempt from the probate process under state law. But that doesn't mean that the estate doesn't exist.

Did the house pass into the estate?

If so, then the estate may not have been insolvent.

However, if the house did not pass through the estate, then the estate was almost certainly insolvent, because it had liabilities and no meaningful assets.

Was the house deeded in a way that it passed to her son automatically upon her death?

Or was in a trust or something?

If the house was deeded to her in standard form, as the sole owner, then her son really inherited the house. Regardless of whether she had a will, the house would have briefly passed through the estate. If that's what happened, then the estate may not have been insolvent, and the estate may have some tax liability associated with the cancelled debt.

At least in theory, the son may be on the hook. Like I said, there was an estate, so therefore there were heirs and an executor or administrator.

And if the estate had sufficient assets to pay the tax liability in question, but all the assets (i.e., the house) were distributed to heirs prematurely...

then the IRS can recover the tax from the heirs who now have those assets, or from the executor or administrator.

BMK