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Expert Q&A

Do I have to pay taxes on deceased husband’s debt?

Spouses don’t have to pay taxes on their deceased partners’ debt as long as that debt was in their partners’ name and not theirs

Summary

If your husband had an estate, and if the estate had not been insolvent (had money in it to pay debts), the estate would have had to pay tax on any canceled debt.

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Dear Sally,

I just received a Form 1099-C for from for my deceased husband from his credit card issuer. He passed seven away years earlier, and he was insolvent at that time. There was no estate.

The “event code” listed on Form 1099-C is “E.”

Do I have to do anything with this? The card was in his name only, and so is the Form 1099-C. Thank you for your help.  –Cindy

Dear Cindy,

A 1099-C form is issued when lenders cancel debt of $600 or more of a balance owed to them. That amount is considered income and typically has to be included on the return of the person who owed the money. However, the event code “E” means the debt was canceled due to probate or a similar proceeding, according to the Internal Revenue Service. In other words, it was canceled because he died. It’s interesting that the bank waited six years to file a Form 1099-C, unless it hadn’t noticed until recently that he had passed.

It doesn’t matter why the bank waited so long to send a Form 1099-C. Your name is not on the Form 1099-C, and you are not filing a joint return with your husband at this point. You are not required to report the canceled debt on your own return, nor should you do so.

If your husband had an estate, and if the estate had not been insolvent (in other words, it had money in it to pay debts), the estate would have had to have paid tax on any canceled debt. Of course, if your husband had enough assets to pay his debts and had an estate, the credit card company would have lined up with the other creditors, expecting to get paid, so there would be no canceled debt.

See related: 6 exceptions to paying taxes on forgiven debt

Are surviving spouses liable for unpaid debts?

Some people worry about whether they may be considered liable for their spouse’s debt, especially if they lived in a community property state at the time of the death. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska is an opt-in community property state, meaning that spouses can divide their property according to community property rules if they choose to do so. They aren’t required to do this, though.

If surviving spouses are liable for “community debt,” the reasoning goes, they are required to report income from the cancellation of debt as well. The IRS instructions for canceled debt in Publication 4681, however, do not say anything about community property rules. The IRS describes situations in which both spouses receive a Form 1099-C for the same debt and how they should allocate the canceled debt income. But they do not tell taxpayers to claim canceled debt income that is reported in their spouse’s name.

If the Form 1099-C had erroneously had been in your name, which happens sometimes, you would need to ask the bank to reissue the form in the correct name. Never ignore an informational form, such as a Form 1099-MISC, 1099-R or 1099-C. The IRS gets a copy of each of these forms, and if the IRS doesn’t see the income reported on your return, its computers will flag your return and you’ll get a notice in the mail.

It’s incredible how much paperwork is involved after someone dies – even when there were few assets and no estate. Here it is, seven years after the event, and you’re still getting mail for him! Fortunately, you can file this form and not give it another thought. Take care, and best of everything to you as you build your financial future on your own.

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