Jack from Ohio Posted April 20, 2017 Report Share Posted April 20, 2017 Client has a 1099-Cs for a total of $417,000 of Student Loan debt cancellation. It was cancelled due to her being declared 100% disabled. 2016 AGI $32,800 consisting of IRA withdrawal and $3,700 taxable SS income. Question is: Does Student Loan forgivness qualify for exemption on Form 982 due to insolvency? We have differing views on this here in the office. My research has found that there are NO exceptions for claiming Student Loan debt forgiveness as income. Quote Link to comment Share on other sites More sharing options...
Pacun Posted April 20, 2017 Report Share Posted April 20, 2017 The instructions don't say anything about student loan. It only says if you are insolvent. Is he? Line 1b The insolvency exclusion doesn’t apply to any discharge that occurs in a title 11 case. It also doesn’t apply to a discharge of qualified principal residence indebtedness (see the instructions for line 1e on page 4) unless you elect to have the insolvency exclusion apply instead of the exclusion for qualified principal residence indebtedness. Check the box on line 1b if the discharge of indebtedness occurred while you were insolvent. You were insolvent to the extent that your liabilities exceeded the fair market value (FMV) of your assets immediately before the discharge. For details and a worksheet to help calculate insolvency, see Pub. 4681. Example. You were released from your obligation to pay your credit card debt in the amount of $5,000. The FMV of your total assets immediately before the discharge was $7,000 and your liabilities were $10,000. You were insolvent to the extent of $3,000 ($10,000 of total liabilities minus $7,000 of total assets). Check the box on line 1b and include $3,000 on line 2. 2 Quote Link to comment Share on other sites More sharing options...
Catherine Posted April 20, 2017 Report Share Posted April 20, 2017 I cannot find ANY exclusion from income for student loan debt. However, any inclusion of income is dependent upon insolvency. So do that worksheet (balance sheet, really). 3 Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted April 20, 2017 Report Share Posted April 20, 2017 https://cpawilmingtonnc.org/cancelled-debt-cpa-discusses-tax-consequences-of-student-loan-forgiveness-cancellation-and-discharge-insolvency-form-982-and-form-1099-c-from-92-instructions-form-1099-c-instructions/ 3 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted April 20, 2017 Report Share Posted April 20, 2017 Jack, I agree with you that this is taxable income. The only carve-out for not being taxable income is for loans forgiven under 108(f) where the student works in certain professions or classes of employer for a designated period of time, or for certain refinancings, and obviously these aren't the case with your client. One of those is the link that ILLMAS provided. I would treat this as any other cancellation of debt that is taxable AND has the potential for exclusion under the rules in sec 108(a) to the extent the person is insolvent. Do the worksheets to determine the involvency and go from there. In other words, treat it like any other 1099C and include the student loan debt in the liabilities on the worksheet. Found this on the Nelnet website related to Student Aid, says it's an Office of the U.S. Dept of Education. Re: cancellations due to Total and Permanent Disability: Quote https://www.disabilitydischarge.com/faqs Are there any tax implications after approval and discharge of my federal student loans? Yes. If we approve your discharge because of VA documentation, we report the discharge of any loan debt totaling $600.00 or more to the Internal Revenue Service (IRS) for the year that the loan was discharged. If we approve your discharge because of SSA documentation or a physician’s certification, we report the discharge of any loan debt totaling $600.00 or more to the IRS for the year in which you completed the three-year monitoring period. If we report the discharge to the IRS, we will send you a 1099-C for the tax year that we sent it to the IRS. The amount of the discharged debt will be considered income for federal tax purposes and possibly for state tax purposes. You may want to consult with a tax professional to determine how this may affect your personal taxes. A notation in the U.S. Federal Register, 2012, Title 34 for Dept of Education, on pg 4 of the linked pdf, righthand column, says : "The treatment of loan amounts discharged based on the borrower’s TPD as income for Federal tax purposes is governed by the Federal tax code, not the HEA." Again, the IRC addresses only those discharged under 108(f), and makes no mention of discharge for TPD as an exclusion. 3 Quote Link to comment Share on other sites More sharing options...
SaraEA Posted April 21, 2017 Report Share Posted April 21, 2017 How on earth did anyone accumulate over $400k in student loan debt? I never thought it was possible to even borrow that much. She must have gotten one heck of an education, so try asking her to interpret the IRC! I agree that the debt is taxable but insolvency might erase some of it. We were only told her income, not her assets. 3 Quote Link to comment Share on other sites More sharing options...
Lee B Posted April 21, 2017 Report Share Posted April 21, 2017 The son of one of my former clients accumulated $ 300,000 going thru Med School. 3 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted April 21, 2017 Report Share Posted April 21, 2017 I also have a client that accumulated ~ $400K in debt going through undergrad, medical school, then double majors in specialties. 1 Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted April 21, 2017 Report Share Posted April 21, 2017 One of my Doctor clients was interviewing potential new Doctors to join the practice. One of the questions he asks is: "How much Student loan debt do you have?" And it is not unusual for him to hear $200-300K. The winner was $463K. The only thing that works for your client in insolvency. If not, she just exchanged student loan debt for a tax debt. Rich 3 Quote Link to comment Share on other sites More sharing options...
DANRVAN Posted April 21, 2017 Report Share Posted April 21, 2017 1 hour ago, Richcpaman said: If not, she just exchanged student loan debt for a tax debt. Good point. 3 Quote Link to comment Share on other sites More sharing options...
RitaB Posted April 21, 2017 Report Share Posted April 21, 2017 4 hours ago, Richcpaman said: If not, she just exchanged student loan debt for a tax debt 2 hours ago, DANRVAN said: Good point. Yes, that IS a good point. But she'll take Door #2. 2 Quote Link to comment Share on other sites More sharing options...
RitaB Posted April 21, 2017 Report Share Posted April 21, 2017 8 minutes ago, RitaB said: Yes, that IS a good point. But she'll take Door #2. I'm not advocating skipping out on your obligations, and I realize Jack's client has a special case. My daughter is in grad school, I am paying for it, along with the Nashville rent. She has classmates who owe 2 1/2 times what tuition and rent have cost me. They are paying living expenses and maybe living it up expenses with loans. My daughter says they should be whipped. She's a hugger too. 6 Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted April 21, 2017 Report Share Posted April 21, 2017 I know someone that knows someone that used students loan monies to shop at Victoria Secrets and coach. 3 Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted April 21, 2017 Report Share Posted April 21, 2017 4 hours ago, RitaB said: My daughter is in grad school, I am paying for it, along with the Nashville rent. She has classmates who owe 2 1/2 times what tuition and rent have cost me. They are paying living expenses and maybe living it up expenses with loans. My daughter says they should be whipped. She's a hugger too. I need you to introduce your daughter to my son. He went through 5 years of college and never touched a loan or his college savings we put away for him. Wants to go on to get a masters degree but won't start until he has the funds saved. Sounds like the two of them had great parents teaching them about money. But don't let her hug him. Tom Newark, CA 6 Quote Link to comment Share on other sites More sharing options...
Roberts Posted April 26, 2017 Report Share Posted April 26, 2017 Student loan debt is not forgivable from disability but the IRS will often times negotiate a settlement. This person would have a $100k tax bill and for most disabled people, that's going to generate insolvency so the IRS has an incentive to negotiate a far lower rate. I'd bet they'd work that through an offer in compromise formula. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted April 26, 2017 Author Report Share Posted April 26, 2017 2 minutes ago, Roberts said: Student loan debt is not forgivable from disability but the IRS will often times negotiate a settlement. This person would have a $100k tax bill and for most disabled people, that's going to generate insolvency so the IRS has an incentive to negotiate a far lower rate. I'd bet they'd work that through an offer in compromise formula. It was discharged due to 100% disability. The clients have received 1099-C for the amount discharged. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted April 26, 2017 Report Share Posted April 26, 2017 1 hour ago, Roberts said: Student loan debt is not forgivable from disability but the IRS will often times negotiate a settlement. Roberts, not true. Take a look at the chart on this page from the Dept of Education and look at the various types of loans and reasons they may be cancelled, forgiven, or discharged. https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation#when Quote Link to comment Share on other sites More sharing options...
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