How to file 1099-C on behalf of a deceased spouse

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Question Dear Sally,
My husband passed away in February 2016. I received Form 1099-C in his name for $15,000 for cancellation of a credit card debt. It has Code G marked, which says, “Decision or policy to discontinue collection.”

My name is not on this credit card. Do I have to include this income on my taxes this year? Sally, I am so upset. I hope the IRS doesn’t take my home if I can’t pay this. I live in Virginia.  – Stacey

Answer

Dear Stacey,
When the 1099-C Cancellation of Debt forms come out every year, they cause a lot of people huge amounts of worry and stress. Most of that worry is unwarranted or overblown, fortunately.

In your case, you probably owe little or no any tax on your late husband’s canceled debt. If you do have a tax bill as a result of it, you won’t lose your house over it. You have three things working in your favor.

First, most people have debt canceled when they have more debts than assets with which to pay them. That means they probably qualify to have some or all the canceled debt excluded from income because of “insolvency” – debts in excess of assets.

Second, even if some of the income from canceled debt must be included in your income, it may not be taxable. Your husband died early in the year, so he probably didn’t have much earned income. By the time you had reduced joint income last year, and you take your full deductions and exemptions, you may not owe any tax at all, or it may be much less than you feared.

Lastly, if you do owe a balance to the Internal Revenue Service, that doesn’t mean they’re coming for your house. Yes, the IRS can seize people’s houses or businesses. That’s not their preferred method for collecting back taxes, however. You would generally have to ignore a lot of IRS notices and refuse to set up a payment plan or otherwise work with them before that would happen.  

Here are your two options for filing your 2016 tax return:

1. Your husband died in 2016, which means you can still file a joint tax return with him for the entire 2016 tax year, assuming you did not remarry before the end of 2016. If a court has appointed a personal representative or other estate administrator, you can file a joint return if the representative agrees.

In most cases, filing jointly is a better idea than filing separately. You use the higher Married Filing Jointly standard deduction and other benefits for the entire year this way, plus you claim his personal exemption.

If you file jointly, include the canceled debt as his income on the return. You can then file IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to claim insolvency if you and your husband’s debts exceeded your assets at the time the debt was canceled.

I recommend preparing a joint return using tax software, or with a tax professional if you prefer, to see if the canceled debt significantly affects your tax bill.

2. If you prepare a joint return and find that your husband’s forgiven debt causes you to jointly owe more tax, you can try using the Married Filing Separately filing status.

Because you live in Virginia, you are not in a community property state. The canceled debt is clearly in his name, so you shouldn’t enter the income from canceled debt on your Married Filing Separately return.

Your husband’s personal representative (which could be you if you oversee your husband’s property and there is no court-appointed representative), should file a separate return for him. The Form 982 should be filed, using his assets and debts only, to see if the income from canceled debts may be excluded.

Taking care of a person’s estate and taxes after they die can be complicated, especially if the deceased person had many assets and other financial issues. Life is hard enough when you are recently widowed. Be sure to get qualified legal and tax help as necessary, and any other help you need to get through this difficult time.

See related: Many who qualify fail to take canceled debt tax exemption, 1099-C frequently asked questions

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Updated: 11-24-2017