South Florida Sun-Sentinel (Sunday)
Tax treatment of discharged debt — and other questions
Q: My husband died, leaving me with no assets but a $25,000 credit card debt. The credit card company dismissed the debt and sent me a 1099-C indicating the discharged debt. Do I have to report this on my tax return? Am I liable for taxes due? I don’t want a problem with the IRS. A former tax preparer told me that I don’t have to report the canceled debt.
A: If the amount of your debts, including the amount of the forgiven debt, is greater than your assets, then you will not be required to pay any taxes on your canceled debt up to the insolvent account. However, you must file IRS Form 982 to show the IRS that you do not owe any money because of the canceled debt. The financial institution sent a copy of the 1099-C to the IRS, so if you don’t file form 982, the IRS may assume that you do owe income taxes on the canceled debt. I don’t agree with the advice you received. You have to protect yourself by filing Form 982.
Q: In one of your columns, you indicated that in addition to the $10,000 limit ($20,000 for a joint return) for I bonds, you could also invest an additional $5,000 per year if you received a tax refund. Can you still do that with an extension, and is it $10,000 for a joint return? A:
I spoke with a representative of TreasuryDirect, and he indicated that even if you filed for an extension, you could still purchase an additional $5,000 in I bonds. You would have to file IRS Form 8888 with your tax return. Even if you are filing a joint return, the limit for investing a refund is only $5,000, not $10,000. However, you could purchase an additional $10,000 per year if you have established a trust.
Q: I understand that some disabled veterans can get a waiver on real estate taxes. Is that exemption available in all states? A:
The exemptions vary among states. If you do an internet search with the keywords “Samantha Reeves property tax exemption by state,” you will see an article on the website for Veterans United with a list of the exemptions available in states that do allow them. You can also call 1-800-884-5560 for more information.
Q: I would like to purchase I bonds in my Roth IRA account. Is that possible?
A: No. Until I bonds are available for purchase through financial institutions, which is not the case today, you can’t purchase I bonds for Roth accounts. You can contact U.S. Treasury Secretary Janet Yellin at correspondence@treasury.gov, and ask her to consider that alternative.
Q: I am confused about ownership forms for I bonds and other TreasuryDirect investments. What are the alternatives? A: Good question. I consulted a Treasury representative. (You can ask questions via email at Treasury.Direct@fiscal.treasury. gov and they will answer in a few days. It’s easier than contact by phone; the delays are long by phone.)
For individuals the options are: single owner; owner with beneficiary; primary owner with secondary owner; if there are specific limitations for a specific investment, a Treasury representative will inform you.
For entities, the options are: sole proprietorship, corporation, limited liability company or professional limited liability company (LLC or PLLC), trust, decedent’s estate, or estate of a living person, such as an incompetent or a minor.