My father passed away in January 2020, and my mother filed a final joint tax return for 2020. She no longer has any income (other than social security) and is not required to file a tax return for 2021. Before my father passed away, my parents placed most of their assets in a joint living trust. The only assets that were not placed in the trust were a business checking account (which was attached to a sole proprietorship that was owned in my father's name only) and 2 cars (both more than 20 years old).
The sole proprietorship was a small auto repair shop that was closed soon after my father passed away. No probate or estate tax return was needed. My parents have only resided in California.
Wells Fargo sent a letter that they were going to file a 1099-C for forgiven business debt (about $51,000) in my father's name and social security number for the date of 12/31/2021. We have not received an official 1099-C form yet, only a statement. (We anticipate another 1099-C from Bank of America for other forgiven business debt, possibly in 2022; we are working with BofA to close the business checking account still. No funds have been distributed to my mother from the BofA business checking account yet.)
When I asked several accountants, one CPA said that we should file a 1041 for my father's estate along with a 982 for insolvency. Another CPA said that my mother may need to file another joint tax return because she is responsible for my father's cancelled debt since my parents resided in California, a community property state. However, the cancelled debt was issued after the final joint tax return was filed last year.
What should we do? I have reached out to a tax attorney but they are slow to respond since it is tax season. We are getting anxious because the April 15 deadline is fast approaching.
I understand from other posts here that the 1041 and 982 forms seem to be the correct response to a deceased person's 1099-C. Is this something fairly simple that we can do using Turbo Tax?
We would greatly appreciate anyone's help!
You cannot file form 982, Discharge of Indebteness using the TurboTax Business program, which is what you would need to use to prepare the trust tax return. You can prepare the form for an individual tax return using the download TurboTax program for individuals, but that wouldn't be appropriate in the year the debt was cancelled, since a final return had been filed in 2020.
It may be best to file an extension for the Trust tax return, form 7004, and wait for advice form the professional, especially since so much income is involved.
Thank you very much for replying! I didn't know you could file an extension for an estate income tax return. The attorney finally responded and said they were too busy to help. I'll have to keep looking for answers somehow.
Thank you again!
According to the instructions in IRS Publication 4681, In most cases, you don't have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance (see page 4).
This publication also includes the insolvency worksheet which may help to determine if the debt cancellation is taxable to the estate. As indicated by @ThomasM125 legal advice from an estate expert would be your best course of action.
Thank you very much for replying and providing the link to publication 4681! After reading it, it seems like filing forms 1041 and 982 are correct. Most of my father's assets were in the trust so they wouldn't be included in estate assets, right? That would make the estate insolvent.
This is really a legal question that you will need to obtain advice about.
Here is what I know, trusts and estates both exist.to distribute assets, they do so in different ways. A trust is usually created while the grantor is alive, and an estate is created at the moment of someone's death. A trust is intended to be a semi-permanent entity based on the trust documents and establishment.