Hi Wanda and welcome to Just Answer!If I do this will it be counted as income against me?The forgiven debt would be your income ONLY if you are personally liable for the loan. Because that is a loan for which the estate is liable - that might be reported as an income of the estate - not yours. How would this affect my Disability? That woudl not affect your disability because that is NOT earned income. Only wages or self-employment income might affect your qualification for disability.Would it cause me to lose my Disability check? Your disability would not be affected in any way - as long as you do not have earned income. So far based on your information you woudl NOT lose your disability benefits.Will I owe taxes also?You personally will NOT owe any additional taxes. However - because cancelled debt will be a taxable income for the estate - the estate might have some tax liability unless the estate could clain an insolvency exemption. See more information here - http://www.irs.gov/uac/What-if-I-am-insolvent%3F But you personally will not owe any taxes.
The expert above is correct that it won't be taxable income to you for cancellation of debt. However, if the line of credit was secured by the house, and the mortgage is in your mother's name, and the house was her principal residence, the Mortgage Debt Relief Act of 2007 allows this debt to be forgiven without tax consequences. This would require the filing of Form 982, Reduction of Tax Attributes, and reduce your basis in the house, assuming that you inherited the home. You would have to reduce your basis from the FMV at the date of death by the amount of debt forgiven.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.
You can also use the Interactive Tax Assistant available on the IRS website to determine if your canceled debt is taxable. The ITA takes you through a series of questions and provides you with responses to tax law questions.