W-2 of Deceased Spouse

[peggysioux]

Taxpayer's spouse died several years ago. Taxpayer received a W-2 and 1099 under deceased spouse's social security # due to a class action suit. Taxpayer does not want to request correction of deceased husband's W-2 even though W-2 was issued incorrectly with federal and state withholdings rather than correctly reporting on 1099 under taxpayer's social security #. She said she did not want to go through the hassle and didn't care about getting corrected......so, should I include the the W2 and 1099 income on taxpayer's tax return as "other income"???

Peggy Sioux

[MAJ]

If it was earned income then it cannot go under other income. Other income is not subject to SS/Medicare.
It also depends on the source of the income. If it was a bonus of some sort (similar to Auto Sales Industry) then yes, it can be other income and is not subject to SS/MC.

[Anarchrist]

Isn't this IRD and not her income?

What are the dollar amounts? I'm going to guess about $1K of income w/ $100 of taxes withheld.

[peggysioux]

Isn't this IRD and not her income?

What are the dollar amounts? I'm going to guess about $1K of income w/ $100 of taxes withheld.

It is IRD and the amounts between the W2 and 1099 are approx. $2500 with $350 of taxes. Taxpayer still has bank account with both her and her husband's names (husband died over 6 years ago) so she just deposited into checking account. I found the following example in Pub 559:

How To Report

Income in respect of a decedent must be included in the income of one of the following.

• The decedent's estate, if the estate receives it.
• The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it.
• Any person to whom the estate properly distributes the right to receive it.

Example 1.

Frank Johnson owned and operated an apple orchard. He used the cash method of accounting. He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but didn't receive payment before his death. The proceeds from the sale are income in respect of a decedent. When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. When Frank's widow collects the $2,000, she must include that amount in her return. It isn't reported on the final return of the decedent or on the return of the estate.

I know the correct handling is to request corrected W-2 and 1099 but taxpayer says just too much hassle........so how would other tax preparers handle?

Peggy Sioux

[Burke]

The problem is you said he died "several years ago;" therefore she cannot file a joint return. Since the withholding was reported under his SSN, she will not get credit for it. She can report the income, but she is out of luck on the tax withholding. I have had this happen; and if she wants credit for the taxes, she must get a corrected W-2 (or whichever form the withholding is on.) And the reporting entity must correct it with the IRS as well for it to process. I had the IRS tell me a long time ago, the employer had two choices. Correct the W-2 or refund the withholding tax to the spouse (daughter in my case) and adjust on their next 941. They corrected the W-2 (1099-R in my case) to show the correct name and SSN of the bene. They may tell you they cannot do it; trust me, they can. You just need to keep going up the chain to a higher up, preferably someone in their Tax Accounting Dept, and tell them that is an IRS rule. If the type of income is the sort that is not subject to SS/MC, then they will need to refund the FICA to her by check. I guess it boils down to -- does she want to give up the credits.

[peggysioux]

The problem is you said he died "several years ago;" therefore she cannot file a joint return. Since the withholding was reported under his SSN, she will not get credit for it. She can report the income, but she is out of luck on the tax withholding. I have had this happen; and if she wants credit for the taxes, she must get a corrected W-2 (or whichever form the withholding is on.) And the reporting entity must correct it with the IRS as well for it to process. I had the IRS tell me a long time ago, the employer had two choices. Correct the W-2 or refund the withholding tax to the spouse (daughter in my case) and adjust on their next 941. They corrected the W-2 (1099-R in my case) to show the correct name and SSN of the bene. They may tell you they cannot do it; trust me, they can. You just need to keep going up the chain to a higher up, preferably someone in their Tax Accounting Dept, and tell them that is an IRS rule. If the type of income is the sort that is not subject to SS/MC, then they will need to refund the FICA to her by check. I guess it boils down to -- does she want to give up the credits.

I advised the taxpayer to go back to issuer to have corrected but her response was she did not want the hassle and would forego the withholding taxes. So being I have a W2 and 1099 under deceased spouse name, would I just include as "other income" on taxpayer's tax return?

[Rapid Robert]

taxpayer says just too much hassle........so how would other tax preparers handle?

She received over $2K cash, and if she says getting back the $350 withholding is "just too much hassle", I would take her at her word and just include on her return the income (but no withholding) as reported. Reporting extra W-2 income (use the "non-standard W-2" flag in you software) should not result in a problem with the IRS. She will still have to pay income tax, but according to Pub 559, I don't believe the income is subject to FICA taxes. Get her instructions to you in writing in case she tries to blame you later.

[Burke]

And note the OP stated they withheld state taxes too. So she can forget them as well. Her biggest mistake was (1) not changing the bank account into her name after he died, and (2) depositing the checks when received instead of sending them back and dealing with this at the time it occurred. If it is not subject to FICA, she is throwing away more money than I would. Just out of curiosity, how much was all of it added together? Plus what she is going to have to pay in taxes over and above the withholding? I doubt if the payor made a mistake. She probably didn't notify the [attorney/payors?] that her husband was deceased either, while the lawsuit was still pending.

[peggysioux]

And note the OP stated they withheld state taxes too. So she can forget them as well. Her biggest mistake was (1) not changing the bank account into her name after he died, and (2) depositing the checks when received instead of sending them back and dealing with this at the time it occurred. If it is not subject to FICA, she is throwing away more money than I would. Just out of curiosity, how much was all of it added together? Plus what she is going to have to pay in taxes over and above the withholding? I doubt if the payor made a mistake. She probably didn't notify the [attorney/payors?] that her husband was deceased either, while the lawsuit was still pending.

The $350 is inclusive of federal and state w/h's and FICA.

Peggy Sioux

[Rapid Robert]

"would I just include as "other income" on taxpayer's tax return?"

Previously I suggested using the non-standard indicator for Form W-2 in your software, but I take that back, it is not necessarily a non-standard W-2 (handwritten, etc). But I would still recommend entering it as a W-2, not as other income, because someday the IRS may try to match it somehow, and that will be easier if it was originally reported as the type of income it actually is.

My software has the following option when I enter data on the W-2 facsimile screen, it is what I would use in this case. There is a similar option for the name as well. It would more or less amount to a "nominee" W-2. I can't see where it would hurt to enter the withholding as well, the worst the IRS could do is disallow credit for the withholding. (It's not enough to trigger any accuracy penalties). But by entering the W-2 this way, you have a chance the IRS computer might actually match it somehow, which it will never do if it is under "other income".

"If the Social Security number on Form W-2 does not match the taxpayer’s identifying number in the 1040 screen, enter the Social Security number exactly as it appears on the taxpayer's copy of Form W-2."

[Burke]

"If the Social Security number on Form W-2 does not match the taxpayer’s identifying number in the 1040 screen, enter the Social Security number exactly as it appears on the taxpayer's copy of Form W-2."

If this works, I would love to know................