1099-C for deceased taxpayer

[cathe]

I have a client whos wife passed away early last year. She was young and had a student loan. He just received a 1099-C for her student loan cancelled on her date of death. Surely her death is an exemption since the debt was not his? Can't find anything on the 982 to cover this event.

Cathe

[kamckinley]

Hi Cathe. According to the FinAid website, "Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income."

However, I seem to remember that a taxpayer was able to avoid paying tax on his spouse's cancelled student loan by filing MFS in the year of death instead of MFJ. I can't find a reference to back this up though. Does anyone have any experience with this?

http://www.finaid.org/loans/forgivenesstaxability.phtml

[Kram BergGold]

Question

Would filing MFS work if the deceased had assets like 1/2 ownership of a house or bank accounts at the time of death? My guess is not.

[mastertaxguy]

1099-c: Community property?

I have a client whos wife passed away early last year. She was young and had a student loan. He just received a 1099-C for her student loan cancelled on her date of death. Surely her death is an exemption since the debt was not his? Can't find anything on the 982 to cover this event.

Cathe

1. Are taxpayers/deceased residents of a community property state?
2. An insolvency worksheet might show the deceased spouse was actually insolvent, assuming ownership of joint real estate, etc.
3. Sometimes IRS asserts, in situations such as you describe, that the COD income goes to the deceased's estate: if so, then the estate may be insolvent since, at the moment of death, most jointly held property would be the sole property of the surviving spouse/joint owner.
4.

[DaveO]

I had this situation a couple years ago. I thought about the MFS route but the deceased had other income and withholding and MFS would have caused the loss of other tax credits for the surviving spouse. As it was there was plenty of withholding to cover the tax so we went the MFJ route.

I looked long and hard for an exception but couldn't find one. I read a court case where the parents had co-signed the daughters student loan and were stuck with the COD after she died. I figured if there was no exception there I was out of luck.

[cathe]

Thank you

Thank you all. I surely did not see a way around this, but needed to ask to make sure I was doing right by my client.

Cathe