Cancellation of debt for student loans doesn’t always mean you’re off the hook with the IRS. If you received a Form 1099-C, your cancelled student loan becomes taxable income on your Form 1040 unless you can exclude it through one of the provisions of Form 982. Hi, I’m Gary Bode, an IRS insolvency CPA with a virtual office to help with the tax consequences of student loan debt cancellation wherever you live. Here’s a rough rule of thumb to calculate the potential taxes due on cancelled debt. Figure 25-30% of Box 2 of Form 1099-C. I’ll give some tips on how I approach cancellation of debt for student loans.
Were you supposed to get a Form 1099-C for student loan cancellation?
In some situations cancellation of debt for student loans isn’t taxable and doesn’t require a Form 1099-C. Confusion abounds. But the IRS assumes Form 1099-C is valid and you have to prove otherwise. You’re supposed to wrangle with your bank to correct the mistake. But sometimes you can get the IRS to help.
Is the amount in Box 2 of Form 1099-C the amount of student loan actually forgiven?
Banks make mistakes.
Provisions of Form 982. Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) used for student loan cancellation
Two provisions of Form 982 might keep your student loan cancelled debt from becoming taxable income; bankruptcy and insolvency. I’m not covering bankruptcy here. I’m not a bankruptcy attorney and I recommend you consult one to determine the benefits and consequences.
Insolvency Provision of Form 982 for student loan cancelled debt
Insolvency for Form 982 is different from bankruptcy. In my experience, it’s usually the only practical way to exclude student loan cancelled debt from taxable income. Here you’ve got a shot at excluding cancelled debt from Line 21 of Form 1040. But there’s no free ride with the IRS. The tax attributes section of Form 982 means you might decrease other tax deductions and credits.
Do you need an insolvency CPA to use Form 982 to exclude your student loan cancellation form taxable income?
It depends. I’m sure some folks handle it themselves. But the first time preparing Form 982 is the hardest. Often there’s a lot of tax consequence at stake. Publication 4681 isn’t written in plain English. New clients often state TurboTax and other tax software doesn’t handle insolvency well. I’ve had at least 20 tax preparers call me for help this year so far. Do some homework. If you get uncomfortable preparing Form 982 give me a call. (910) 399-2705.
Here’s the 2012 Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) .