When a loved one passes away, taxes are one of the last thing his or her family likely wants to think about. However, death is often linked to taxes in significant ways. The estate of a deceased family member or awards from wrongful death cases are typically taxed, but taxes can affect a deceased individual’s family in ways that may seem unusual.
Texas residents who fail to pay their taxes can face serious consequences, like audits, wage garnishment or liens. However, those who can convince the IRS that they are unable to pay their taxes may be able to secure uncollectible status, temporarily relieving them of their tax obligations. Individuals interested in learning more about uncollectible status or any other tax-related issue should contact a Texas attorney specializing in tax law.
When a college student committed suicide in 2011, his student loan servicer discharged the $55,400 that he owed for a Parent Plus Loan, effectively erasing his debt. While this freed his mother from the obligation to pay back his loan, she ended up facing $14,000 in taxes due to an IRS rule regarding canceled debt. An individual who owes money to another party that later forgives the debt must count that debt as taxable income. Because she co-signed her son’s student loan, the deceased man’s mother now owes $14,000 in taxes to the IRS due to this rule on cancellation of debt income, also known as COD income.
Parents across the country faced similar taxes when the U.S. Department of Education forgave $2.7 billion in student loans when the borrowers died, went bankrupt or were disabled. Tax issues related to COD income are particularly prevalent among the parents of deceased students because they nearly always co-sign their children’s loans.
Source: Forbes.com, “There’s No Escape: Death, Taxes And Student Loans,” Robert W. Wood, Sep. 20, 2012