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Mother is 89 yrs old. Has dementia and just went into a nursing home. Applying for Medicaid. Just received a 1099 C form from PNC bank on a charged off car loan balance left $12,000. My mother has no assests, no income other than social security $12,000 a year. Has credit card debt of $4,000 and does have a cash value of life insurance of $4200. Will use the cash value of life insurance toward funeral expenses. In the state of PA , could the loan balance from 1099C be considered a ghost amount and not affect her Medicaid application?

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Rondino - here’s my not a cpa understanding, if insurance is...
- term life with face value of $1500 but it’s like really really old policy and paid up and so old that it’s worth over the face value but that extra build up is plowed back into the policy & isn’t paid till death, & If it’s this, it’s the face value that matters for Medicaid not the death value.
These sometimes pay a dividend as well - look to see if she got a 1099 income as the dividend paid will be income reported. Usually these are smallish amounts but if her SS & retirement monthly is right close to your states max, the month paid that dividend might take her over the max monthly allowed, & you might need CPA to do an amortization letter for her. The good part is the same CPA can do 1040/982

- if it’s whole life, those have a cash value & whatever it is has to be cashed out till it’s within your states limits for life insurance.

- if you buy the policy it has to be at fair market value if this is done within the 5 yr look-back which u don’t have. And whatever you buy it for ends up being a spend down for your mom. To me, I’m not sure what kinda advantage this can be. Really if it’s over the limit, buying a irrevocable preneed funeral would be the easiest things to do. If it’s like 4K, that maybe just maybe will pay 1/2 the cost of a traditional funeral.
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Reply to igloo572
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Rondino Oct 18, 2018
Thanks again for your response.
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1099-C for cancellation of debt usually is sent out in January as it’s reported by the creditor for the prior years taxes. Getting a 1099-c in October seems odd to me.

Is it a tri-part 1099-C? (So has a copy to go to IRS, a copy for state taxes and a copy for you). Or is it a letter of notification that debt is being written off and 1099-C will be issued?

Whatever the case the 12k is taxable income that is reported to the IRS. And to the state, if you have state taxes. Any original creditor owed over $ 600.00 can issue a 1099-C and has to to be able to take it off their corporate tax filing. The bigger creditors do these automatically. Yeah it’s phantom income but it is fully taxable by the IRS. Your mom mom will owe taxes on the 12k.

Now for those on LTC Medicaid, this poses a problem as the IRS as a super creditors can attach her SS or other federal income to get taxes owed paid. BUT Medicaid requires mom to pay almost all her monthly income to the NH as the required copay or SOC (share of cost) to the NH. SO if IRS attaches her SS, then she is out of compliance for Medicaid rules as she cannot pay the required monthly income to the facility. You / mom cannot deal with that happening.

To get around this, mom needs to file 2018 taxes next spring, 2019 and she does both a 1040 and a 982 - their not DIY. It needs a tax pro / CPA to do them. Her tax liability should hopefully zero out. You may find that mom may get 1099 C from other creditors as well. You may want to have that CC write off the 4K asap so it too can get folded into the 1040/982 filing next spring. In theory, the original creditors must issue the 1099-c by Jan. 31, 2019 for 2018 write offs is my understanding. Really try to get all write offs for this tax year, Otherwise if they carry the debt into next year and write it off as 1090-C for 2019, you have to do the 1040/982 for spring, 2020.... Some original creditors will carry it longer as they can add on interest, fees, etc.

also please find out clearly as to how a cash value from a life insurance policy has to be spent down. It may be that the $4200 cash value has to be placed into an irrevocable preneed funeral or burial policy and not just allowed to sit in a savings account.
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Rondino Oct 17, 2018
Thank you
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It depends on how the state's program is set up. I would hire a CPA or lawyer to file a form 4598 to dispute and discharge the debt with the IRS.
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Rondino Oct 12, 2018
thank you
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I think this is considered income when a creditor writes off the debt. Even though, no money changed hands. See what other members say.
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