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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22696
Experience:  Taxes, Immigration, Labor Relations
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Good afternoon. My husband received two 1099Cs for forgiven

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Good afternoon. My husband received two 1099Cs for forgiven debt for 2012. We have an extension until October 15th, 2013 and a married filing jointly return all ready to go. But there is a problem (besides the fact that "we" now owe more than $10,000). The 1099Cs are in my husband's name for credit cards that were also in his name. The creditors (two Chase accounts) have removed these delinquencies from my credit report, stating I am not liable for these debts. This is important because we have not lived as husband and wife for more than 5 years, although neither of us has filed for divorce yet or openly talked about divorce. If I sign this joint return and we actually divorce in the next year or two, I am afraid I will not be able to pay for "my half" of this debt repayment. My attorney wanted me to move out and file separately, avoiding the debt entirely, but I'm not financially able to support myself yet. We live in Texas. Any suggestions?
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to Just Answer!
As long as you were not liable for these debts - you should NOT be held responsible for any tax liability related to cancelled debt income. If you were able to convince the creditors to remove these delinquencies from your credit report - you may use that fact to convince the IRS.

Customer:

Hi, Lev! I'm sorry I stepped away from my computer for a minute.

Customer:

The big question, I suppose, is "how"?

Lev :

The issue is that the IRS might come up with that question if you will file a joint tax return - and if you want completely avoid any questions from the IRS - I agree with your attorney - and suggest to file separate tax return.
Filing a joint tax return MAY trigger questions from the IRS - we may not predict if there will be any questions or not - but that is possible. In this case - you would need to convince the IRS the same way as you convinced the creditors.

Customer:

Filing a "married, filing separately" in Texas is a little tricky, as I understand it, because won't all deductions, etc, and income (I presume including the 1099C "income") be divided in half? That's the confusing bit

Customer:

If I was separated from my husband, my attorney suggested I could claim I didn't have access to any other records than my own. But if I am still living with him, it doesn't seem like I have this option.

Lev :

Filing a "married, filing separately" in Texas is a little tricky, as I understand it, because won't all deductions, etc, and income (I presume including the 1099C "income") be divided in half?
Yes - because Texas is a community property state - you need clear separate community and separate income and deductions. However if you are not living with your spouse - the community law may be disregarded. You may find details in the IRS publication 555 - www.irs.gov/pub/irs-pdf/p555.pdf‎

Customer:

Wow. I wish I wasn't living with him. But it doesn't seem possible to leave.

Lev :

Also if the creditors agrees that you are not liable for the debt - that means - you are not liable for income resulted from canceling that debt - and that is your spouse's separate income - not community income. However - that statement may be examined by the IRS.

Customer:

Thank you for the IRS publication information.

Customer:

Those debts on the credit cards were created unequally by both of us. Me on family necessities, him largely on "toys" and trips, etc. I was an authorized user, but not a joint card holder

Customer:

I'd like to talk to the CPA about this, but he is my husband's CPA and I'm concerned he will want to just divide everything right down the middle.

Lev :

In situations like this - income realized from debt forgiveness - teh first step to verify if any exclusion could be used.

Lev :

The most common exclusion for credit card debts is insolvency exemption - that is - if you are insolvent - you may file the form 982 - and that will allow NOT to include the cancelled debt into taxable income.

Customer:

Well, I was looking at the insolvency option at the time the debt was forgiven, but I don't think the numbers proved insolvency.

Lev :

Then - you may take a position we outlined above - if the creditors agrees that you are not liable for the debt - that means - you are not liable for income resulted from canceling that debt - and that is your spouse's separate income - not community income - so that income should not be divided between spouses.

Customer:

So, we would divide the community income, but then the income from the forgiven debt would be added only to HIS return?

Customer:

The issue with fighting this debt for myself is it will bring our relationship issues to the front and we won't be able to ignore them anymore.

Customer:

Once I file separately, it is as good as saying I want a divorce

Lev :

Yes - you should divide the community income - but if you have separate income items - they belong to the person who received (or constructively received) that income and such items are not divided.

Lev :

You still may file jointly - if that gives benefits to both of you. In this case - no need to divide any income items.

Customer:

If I file the joint return as it is currently prepared, it seems I am assuming liability for the debt and if he decides not to continue making payments on it in the future, the IRS could attempt to collect the whole debt from me, correct? Also, if Chase sent him/us 1099cs in 2012, it seems likely Citibank will send their 1099Cs for 2013, if they "forgive" their debts, as well. My husband had four maxed out cards, but we have only received two 1099Cs so far

Customer:

Citibank sent me a letter stating I am not responsible for those debts, as well, but I'm concerned signing a joint return acknowledging this income from Chase will set a precedent

Customer:

I suppose, Lev, I should ask you to clarify what you said about "in this case - no need to divide any income items"

Lev :

You are NOT assuming liability for the debt that was forgiven - but you will assume any tax liability resulted by that tax return even if you later divorce.

Customer:

so my only "free and clear" option is to file separately?

Lev :

I should ask you to clarify what you said about "in this case - no need to divide any income items"
If you are filing a joint tax return - all income and deduction items are combined - that include community and separate income items - so you do not need to worry to whom any specific item belongs for income tax purposes.

Customer:

Okay, Lev, thanks. Earlier, you wrote: As long as you were not liable for these debts - you should NOT be held responsible for any tax liability related to cancelled debt income. If you were able to convince the creditors to remove these delinquencies from your credit report - you may use that fact to convince the IRS.

Lev :

so my only "free and clear" option is to file separately?
If you want to avoid any possible complications at any costs - yes - that is your best option.
Please be aware that by filing separate tax return - your combined tax liability might be higher - so I suggest to prepare tax returns both ways and compare.

Customer:

Can you please tell me if there is a form to attach to my return if I decide to file separately (and blow the lid off my marriage) that will "convince the IRS"?

Customer:

perhaps I should say "may" not "will" convince

Lev :

Can you please tell me if there is a form to attach to my return if I decide to file separately (and blow the lid off my marriage) that will "convince the IRS"?
There is no specific form. If you file a separate tax return - and 1099C's are not issues in your name - it is unlikely that the IRS will ask any questions as long as your spouse will report these amounts on his tax return.
You may attach a letter with explanation of facts and your position - but that is not required.

Customer:

If I could rely on my husband to fulfill his obligations and make payments for the next few years on this tax debt, I would sign the joint return with little protest and pay alongside him like a good wife...but because he is not reliable where money is concerned, I am squirming about this

Customer:

Would a tax tool like Turbotax help me work out the figures of both options in order to decide?

Customer:

I'd ask the CPA, as I mentioned before, but he is very expensive and I am concerned he would notify my husband of my questions

Customer:

BotXXXXX XXXXXne: If we were no longer living together (if I move to my parents, for example) I could file separately and NOT have to worry about community property/community income. But just report my own income?

Customer:

Is this true whether I have filed for divorce at that time or not? Or is filing for divorce necessary to be considered separated?

Lev :

You may use ANY tax preparation software. What you actually need to prepare tax returns both ways and compare what would be your "cost" if you file separately. As I said - most likely - your combined tax liability will be higher.
Please be aware that even after filing a joint tax return - it is possible to file for Innocent Spouse Relief - that that would be another round of complications.

Customer:

Clarify, Lev, please..."combined tax liability will be higher"...but my individual tax liability MUST be less than half the tax debt created by those 1099Cs, don't you think?

Customer:

Or ALL of it, if he decides not to pay. He has no respect for anyone and the IRS is no different

Lev :

BotXXXXX XXXXXne: If we were no longer living together (if I move to my parents, for example) I could file separately and NOT have to worry about community property/community income. But just report my own income?
That is correct - that is from IRS publication 555 which we referenced above
Relief from liability arising from community property law. You are not responsible for the tax relating to an item of community income if all the following conditions are met.
1.You did not file a joint return for the tax year.


2.You did not include an item of community income in gross income.


3.The item of community income you did not include is one of the following:


a.Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee.


b.Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor.


c.Your spouse's (or former spouse's) distributive share of partnership income.


d.Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Use the appropriate community property law to determine what is separate property.


e.Any other income that belongs to your spouse (or former spouse) under community property law.


4.You establish that you did not know of, and had no reason to know of, that community income.


5.Under all facts and circumstances, it would not be fair to include the item of community income in your gross income.


 

Lev :

Is this true whether I have filed for divorce at that time or not? Or is filing for divorce necessary to be considered separated?
As long as requirements above are met - you may request relief from liabilities arising from community property laws. You are not required to be divorced or file for divorce.
see Community Property Lawsin Publication 971, Innocent Spouse Relief - www.irs.gov/pub/irs-pdf/p971.pdf

Customer:

Pub 555 mentions Form 8958

Customer:

Showing how I figured the amount I'm reporting

Customer:

He will be so angry

Customer:

He's angry all the time, but this will really push his buttons

Lev :

Pub 555 mentions Form 8958
Yes - if you decide to file separately - and if there are community items - income and deductions - you need to use this form Form 8958 to determine the allocation of tax amounts between married filing separate spouses.
I suggest as the first step - to prepare tax returns both ways and compare - it is possible that the combined tax liability will be much higher - and you would decide to file jointly regardless of other benefits.

Customer:

Okay, I appreciate your assistance.

Customer:

I have a sinking feeling I will end up filing jointly and just crossing my fingers that he will "play nice" when the time comes to divorce.

Lev :

Sorry for your situation. I understand that there are so many issues from different prospective.

Customer:

I appreciate your condolences. :)

Customer:

If my earnings were higher and I didn't have the house and the kids to be concerned about, I'd be in an apartment by now

Customer:

It will help to already have a finished return to "go from" when comparing the potential of filing separately. Our taxes are complicated. STock sales and car purchases in that year...plus education expenses, etc

Customer:

it is far from a simple 1040EZ. LOL

Lev :

I have a sinking feeling I will end up filing jointly and just crossing my fingers that he will "play nice" when the time comes to divorce.
In worth case scenario - you would have another option - to request Innocent Spouse Relief - we may not predict if teh relief would be granted by the IRS - but that could be definitely an option.

Customer:

It's just not a good scene all around, is it, Lev?

Customer:

I will take a look at my filing separately options tonight and may follow up with you afterwards.

Customer:

Thanks for your time.

Lev :

It will help to already have a finished return to "go from" when comparing the potential of filing separately. Our taxes are complicated. Stock sales and car purchases in that year...plus education expenses, etc
Just as example - if filing separate tax returns - you would not be able to claim educational credits. Some other deductions are not allowed with married filing separately status - so the cost might be relatively high (in additional to making your spouse angry). When you know numbers - you will be more educated to make the decision.

Customer:

The thing that is tripping me up is the "you did not know of, and had no reason to know of the community income"

Customer:

but I DO Know about it!

Lev :

That is correct - if you have community income items - they should be handled "with care" on separate returns. There would not be any issue if you choose to file jointly.
However - based on your information - income from cancelled debt is NOT a community income - that is your spouse's separate income.

Customer:

ah!

Customer:

Okay, so I will go home tonight and put a pencil to it,in a manner of speaking...and once and for all will know whether it will hurt MORE to file jointly or separately. Either way, it is going to hurt. What can I do but smile about it? :)

Customer:

However, according to my understanding, in order to file separately without reporting community income, is to move out of the family home, whether I immediately file for divorce or not, correct?

Lev :

Thus - when you are filing jointly - and all income is combined - that would not really matter - but because that is a joint tax return - you still will be responsible for any tax liability resulted by that tax return.

Customer:

Did you see my last question, Lev?

Lev :

However, according to my understanding, in order to file separately without reporting community income, is to move out of the family home, whether I immediately file for divorce or not, correct?
I listed above requirements for the relief from liabilities arising from community property laws. You are not required to move out or divorce - but that will help you to satisfy these requirements.
For instance - you need to establish that you did not know of, and had no reason to know of, that community income - it is easier to establish if you are not living together. But you are NOT required to live separately.

Customer:

Okay, much appreciated, again. Thanks so much for your patient answers.

Lev :

I am glad to be helpful.
My goal is to provide EXCELLENT service.
If you need any help later - you may return back to this page.

Customer:

Thanks, Lev. So to close, I just rate you EXCELLENT!!! and we're finished for now? :)

Customer:

Talk to you again, perhaps. Have a good evening.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22696
Experience: Taxes, Immigration, Labor Relations
Lev and 7 other Tax Specialists are ready to help you

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