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Tax Question Forgiveness of Debt Income

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#1

So, MIL with some dementia had a credit card.  She kept getting charges on it that she didn't understand or remember and was forgetting to make monthly payments.  Also, at some point, her ne'er do well daughter and grandchildren had got hold of the number and put it in their phones.

Long story short, she wound up racking up about $5000 in charges that the card co contended were authorized and we contended were fraudulent, because a) permission to use revoked and b) card company didn't cancel the card when told to do so.

So, this past year they gave her a forgiveness of debt 1099 of not quite the $5k.

She has no assets, but about $3000/month in SS and a pension, but assisted living bill of more than $5k/month, which I make up the difference on.

She normally doesn't pay tax or file a return because her income is just below the threshold.  But, this 1099 thing will put her over.

It's a defense to forgiveness of debt income that you were insolvent when incurred.  From a balance sheet standpoint, she is insolvent.  From an income statement standpoint, it depends on what day of the month it is, that is, for some days between the time she gets her SS and pension, she has some money, but it is "spoken for" by her rent, and then some.  I do leave a couple hundred dollar cushion in there, so she's "solvent" to that extent.

Anyone have any experience or advice on this scenario?

#3
7 minutes ago, immamac said:

Just don't file the 1099 and say she forgot. 

1099s are sent to the IRS as well as the recipient.  This is bad advice.

#6

As with most things IRS, I would suppose the easiest thing to do would be to file and pay whatever minimal tax there is even out of your own pocket.

In fact, if she hasn't been required to file there may be a credit or deduction somewhere out there you could claim to wash it. 

Medical expense threshold if her income is low and it can exceed the standard deduction by $5k would be an offset???

Keeping that slate clean and them out of her hair would probably be worth an hour of time to file and a few hundred dollars out of pocket for a SIL caregiver.

I'd consider the cost in your time and having an anxious MIL if she got a letter after not filing.  Might be an easy trade.

#7
4 hours ago, TwiceHorn said:

So, MIL with some dementia had a credit card.  She kept getting charges on it that she didn't understand or remember and was forgetting to make monthly payments.  Also, at some point, her ne'er do well daughter and grandchildren had got hold of the number and put it in their phones.

Long story short, she wound up racking up about $5000 in charges that the card co contended were authorized and we contended were fraudulent, because a) permission to use revoked and b) card company didn't cancel the card when told to do so.

So, this past year they gave her a forgiveness of debt 1099 of not quite the $5k.

She has no assets, but about $3000/month in SS and a pension, but assisted living bill of more than $5k/month, which I make up the difference on.

She normally doesn't pay tax or file a return because her income is just below the threshold.  But, this 1099 thing will put her over.

It's a defense to forgiveness of debt income that you were insolvent when incurred.  From a balance sheet standpoint, she is insolvent.  From an income statement standpoint, it depends on what day of the month it is, that is, for some days between the time she gets her SS and pension, she has some money, but it is "spoken for" by her rent, and then some.  I do leave a couple hundred dollar cushion in there, so she's "solvent" to that extent.

Anyone have any experience or advice on this scenario?

I’d file. Sounds like she’s at a very low tax rate. $5K extra income won’t matter much- I assume you’re probably paying it. Filing and paying today might simplify your life a year from now. 

  • Author
#8
1 hour ago, Kennythetiger said:

I’d file. Sounds like she’s at a very low tax rate. $5K extra income won’t matter much- I assume you’re probably paying it. Filing and paying today might simplify your life a year from now. 

True.  I'm sitting  here thinking about it in terms of my tax rate and it's probably not anywhere close to that.

#9
11 minutes ago, TwiceHorn said:

True.  I'm sitting  here thinking about it in terms of my tax rate and it's probably not anywhere close to that.

I think you could probably ignore the whole thing and there’s a really good chance nothing happens. But, if the IRS does take an interest, they’ll compute a tax due and send her a demand letter. Still not the end of the world, but now you’re in it for your time negotiating/preparing a correct return. 
My mother-in-law situation is similar to yours- her tax and legal problems are soon my problems. 
I prepare a decent amount of tax returns every year, and enjoy it. My advice to you is 50% professional and 50% social. My wife bought a house for her mom just to keep her from moving in with us…..  

#11
3 hours ago, Nice Guy Eddie said:

You don’t have to file a tax return even with $36k of income per year? 

I am assuming the $36K was literal income, not taxable income.  Most of her social security income might not be included as taxable income. 

  • Author
#12
On 4/18/2025 at 8:40 AM, Nice Guy Eddie said:

You don’t have to file a tax return even with $36k of income per year? 

When your income is social security and any income beyond that is insufficient to render the SSI taxable, you do not have to either pay tax or file a return over 65.

#13
On 4/20/2025 at 3:12 PM, TwiceHorn said:

When your income is social security and any income beyond that is insufficient to render the SSI taxable, you do not have to either pay tax or file a return over 65.

My mom was in that situation, however she was always worried about getting a huge tax bill.  She paid income taxes out of her social security and pension - got it all back with the tax return in the following year.  

  • 11 months later...
#14

I‘ve never understood why debt forgiveness is taxed. The idea that someone maybe by no fault of their own had some credit card debt forgiven and might have even paid a good chunk of it off in a settlement and then taxed on the balance that wasn’t paid seems counterproductive . Assuming most people in this situation are trying to get back on their feet and potentially have to send a check to the IRS or a reduction in their refund sets them back from reaching that goal.

This seems like a political issue that could find allies in the Left with banks screw over people crowd and the right with the anti tax everything crowd. Especially in this age where credit card rates are north of 20% and consumers get charged a fee for using their cards at their favorite Taqueria or coffee stop.

#15

Just make sure you’re insolvent when the debt gets forgiven. It’s not rocket science.

as for why it is taxed, loans are not treated as an accession to wealth (income) until the debt is forgiven. You get cash but don’t pay taxes on it because of the offsetting loan liability. When you take away the liability, you have to recognize income unless subject to an exception. Pretty simple.

#16
5 hours ago, Apep said:

Just make sure you’re insolvent when the debt gets forgiven. It’s not rocket science.

as for why it is taxed, loans are not treated as an accession to wealth (income) until the debt is forgiven. You get cash but don’t pay taxes on it because of the offsetting loan liability. When you take away the liability, you have to recognize income unless subject to an exception. Pretty simple.

Thanks for the clarification. Either way it’s still a crap sandwich.

#17
3 hours ago, Nueces River Rat said:

Thanks for the clarification. Either way it’s still a crap sandwich.

How's it a crap sandwich? You got money and didn't have to pay it back. That's income.

#18
20 hours ago, Nueces River Rat said:

I‘ve never understood why debt forgiveness is taxed. The idea that someone maybe by no fault of their own had some credit card debt forgiven and might have even paid a good chunk of it off in a settlement and then taxed on the balance that wasn’t paid seems counterproductive . Assuming most people in this situation are trying to get back on their feet and potentially have to send a check to the IRS or a reduction in their refund sets them back from reaching that goal.

This seems like a political issue that could find allies in the Left with banks screw over people crowd and the right with the anti tax everything crowd. Especially in this age where credit card rates are north of 20% and consumers get charged a fee for using their cards at their favorite Taqueria or coffee stop.

I see it with "short sales". Some dipshit buys a house he can't afford at the top of the market, and a couple of years later needs to sell and asks the bank to eat tens-of-thousands to hundreds-of-thousand in loss. He gets a 1099 for that.

  • Author
#19
6 hours ago, Nueces River Rat said:

Thanks for the clarification. Either way it’s still a crap sandwich.

Well, it's pretty much a crap sandwich of your own making. So you can have mustard, or ketchup, or mayo, or all three.

In this instance, MIL let her grandkids borrow her debit card briefly, as to get a tank of gas. They wound up putting it in their google/applepay or whatever and running up a decent four figure balance $10-20 at a time over several months.

#20

If insolvent from an asset/liability standpoint, file the insolvency paperwork with your return and the debt isn’t treated as income. If solvent, debt forgiveness is income because you received money/goods and you get to pay the tax.

#21
On 4/7/2026 at 10:51 PM, Nueces River Rat said:

I‘ve never understood why debt forgiveness is taxed. The idea that someone maybe by no fault of their own had some credit card debt forgiven and might have even paid a good chunk of it off in a settlement and then taxed on the balance that wasn’t paid seems counterproductive . Assuming most people in this situation are trying to get back on their feet and potentially have to send a check to the IRS or a reduction in their refund sets them back from reaching that goal.

This seems like a political issue that could find allies in the Left with banks screw over people crowd and the right with the anti tax everything crowd. Especially in this age where credit card rates are north of 20% and consumers get charged a fee for using their cards at their favorite Taqueria or coffee stop.

It can and does hurt the truly needy, but it is designed as a safeguard to prevent others from avoiding income tax through loan / default arrangements.

#22

dont want to be morose but the mean survival time after a diagnosis of dementia is about 6 years - how long has it been and does it take to get an audit going?

#23

It hurts, but the “truly needy”? The truly needy are almost certainly insolvent. You’ll find some exceptions, like cash-poor homeowners, but they should consider collection alternatives, such as offers-in-compromise if they qualify using the online IRS tool or installment agreements. Shit happens. The IRS knows this, especially now.

#24

It's better to take the medicine. Or file charges on the relatives for threat if they do not pay at least the taxes. But Probably not worth it on the worthless.

If you do not have the cash to pay. File, and immediately ask for a payment plan. The main thing oddly enough is paying. You can not file, and send in a check. and file later even much later and as long as you payed what you owed you incur not penalties. Don't file and owe? I think it used to be 5% a month until capped at 25% annually. Then think of not filing for a few more years, 25% again next year and on and on. I got fucked by an employer in the mid 80's. Wasn't paying my withholding, on my commissions and then went under.

Worse I had a buddy who did not file for like 6-7 years. I have no idea what sort of threatening notices he was receiving, but he was lucky in that he had paid them every year. But one year (unfortunately one a few years old) he grossly underpaid. I helped him organize all the receipts to try and maximize his deductions to keep the bill down. But had he not made those annual payments, he would have been in deep shit. I think he ended up writing. $30K check which was I think 2/3 penalties and interest.

So pay or file and go online and immediately ask for a payment plan.

#25

A payment plan will keep them from coming after you as long as you keep up with the payments, but it won't stop accrued penalties and interest

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