California: Smart Sales Tax Reform Isn’t Dead Yet

When it comes to sales tax reform, the policy answers are pretty straightforward: Unless you’ve got a really good reason to do otherwise, whatever people buy should be subject to tax. It shouldn’t matter where you buy it (on the ‘net or in a store); it shouldn’t matter what color or size it is. Individual purchases should be subject to sales tax. Period.

So from a policy perspective, it’s not especially surprising to see this sort of idea emerging from California: Judy Chu, the chair of the state’s Board of Equalization, is recommending expanding the state sales tax base in a way that could yield up to $10 billion a year.

From state lawmakers’ perspective, the main reason for doing this is adequacy. Since $10 billion is the ballpark estimate for next year’s state budget deficit, anything they can find to plug that hole will be welcome.

But Chu is telling a story that’s much more about consistency and fairness– and she’s right:”We tax exercise equipment, but we don’t tax health club services. We tax movie rentals, but we don’t tax movie admissions,” Chu said.

Of course, tax reform isn’t just about the policy– it’s also about the politics. And judging from recent experience in Maryland and Michigan, the politics are a lot murkier than the policy on this issue. In each of these states, recent efforts to expand the base have been almost immediately repealed. Our Tax Justice Digest takes a quick crack at explaining why reform efforts failed in these states here. For more details on how to broaden your state’s sales tax base, check out our policy brief here.

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Decedent 1099-C

Today TaxMama hears from Thomas in Maryland who tells us. “I was legally separated from my spouse 3 years ago. My spouse passed away 2 years ago. I just received a 1099-C tax statement addressed to her estate. Since I was legally separated, am I obligated to report the 1099-c amount on my taxes?”

Dear Thomas,

Let’s see if we can sort this out, OK?

You didn’t file joint returns after you were separated, right?

You don’t say how much the debt was, or what debt was cancelled – credit card debt, in her name; mortgage debt on her separate mortgage or a joint mortgage; debt from a car loan…? The source makes a difference.

The big question is – who inherited your wife’s estate? If you inherited, then you owned the property and had the right to dispose of it or resolve it.

If you are the trustee of the estate, you are responsible for settling the estate, including dealing with the debts. The trustee may need to file a tax return for the decedent’s trust – Form 1041 to report the cancellation of debt. Naturally, if there are no assets in the estate, you can use insolvency to reduce the debt and owe no taxes. If there were assets…that’s another story.

You do say that the 1099-C was address to your wife’s estate, not to you. So I doubt if you need to include it on your tax return. After all, you can’t file jointly anymore, even if you wanted to. She died two years ago.

However, you’ve clearly left out a lot of information. I don’t feel comfortable giving you a definitive answer. Please, sit down with a good, local tax professional and have them review all the aspects of this situation, OK? Someone needs to see the whole picture, so this doesn’t haunt you in future years.

Take care of yourself.

And remember, you can find answers to all kinds of questions about debt cancellation and other tax issues, free. Where? Where else? At TaxMama.com

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