Tax Forgiveness on that 1099

I received a cancellation debt from bank of America regarding a deceased person with no estate. They said they are going to forgive his debt. He passed-away two years ago. Who will be responsible to pay the IRS with this tax if he is already a deceased with no estate and he is the only borrower of this debt.

IRS Tax Forgiveness act home foreclosure and Debt Cancellation. Update Jan. 5, 2015 – The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.

A 1099-C reports Cancellation of Debt Income (CODI) to the IRS. According to the IRS, if a debt is canceled, forgiven or discharged, you must include the canceled amount in your gross income and pay taxes on that "income," unless you qualify for an exclusion or exception.

If a debt of $600 or more is forgiven or canceled, the IRS requires the creditor to issue a 1099-C tax form to the borrower to show the amount of debt not paid. The IRS then requires the borrower to report that amount on a tax return as income, and it’s often an unpleasant surprise:

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Updated September 5, 2019 – The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

While lenders are only required to send 1099-Cs if a canceled debt is worth $600 or more, you’re still responsible for reporting smaller amounts of canceled debt as gross income on your federal income tax return. And you may be obligated to pay tax on canceled debt, even if you don’t receive a 1099-C for it.

1099-C Cancellation of Debt.. You can use the Insolvency Worksheet to help calculate the extent that you were insolvent immediately before the cancellation. You also must reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.

Claiming Tax Forgiveness. To claim tax forgiveness, the claimant or claimants must complete and submit PA-40 Schedule SP with the PA-40, Individual Income Tax return. On PA-40 Schedule SP, the claimant or claimants must: Determine the amount of Pennsylvania-taxable income.