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Cancelled debt CPA discusses Tax Consequences of Student Loan Forgiveness, Cancellation and Discharge | Insolvency on Form 982 and Form 1099-C | Form 1099-C instructions | Form 982 instructions

Cancelled debt CPA. Form 982 CPA. Form 1099-C CPA. Form 982 instructions. Form 1099-C instructions.

Many Folks don’t realize cancelled student loan debt becomes taxable income, unless you can exclude it through the insolvency exclusion of Form 982, Reduction of Tax Attributes. So they eventually receive an IRS  CP2000. Ouch. For a free consult with an experienced cancelled debt CPA call me; (910) 399-2705.

Hi, I’m a Form 1099-C CPA discussing student loan cancelled debt issues; current tax consequences, future tax consequences and tax reporting rules. Other common terms for student loan cancelled debt include student loan forgiveness, student loan cancellation and student loan discharge. The obligation to pay back the student loan disappears, usually, when the taxpayer becomes disabled. The certification process for disability is a long, stressful process, but when you actually receive permanent disability certification the student loan discharge is straightforward. Except for the tax consequences.

Generally the lender issues a Form 1099-C, Cancellation of Debt. So the IRS tries to land right uppercut. The amount of student loan forgiveness appears in Box 2 of Form 1099-C and automatically becomes taxable income unless we can exclude it through the insolvency exclusion of Form 982. Note – this may not discharge all the student loan. Note there could be future tax consequences (please read the reduction of tax attributes section of IRS Publication 4681). I’ll cover sources of cancelled student loan debt information as well, like the Form 982 instructions. Note the Form 1099-C instructions are for the bank.

Statistically you have a good chance of avoiding the student loan tax obligation. My opinion is that disabled Folks become financially devastated, which in the IRS universe we’re discussing, is a good thing – go figure. Why, because your Form 982 at the time of the student loan discharge uses insolvency as a defense.

Student loan cancellation amount (in Box 2 of Form 1099-C) becomes taxable income on Line 21 of Form 1040 unless you can exclude it through the insolvency provision of Form 982, Reduction of Tax Attributes. How much tax does that generate? Maybe 25-35% of the amount in Box 2 of Form 1099-C; as a rule of thumb. Under certain conditions your student loan cancelled debt isn’t taxable and qualifies for  an exception to the insolvency provision of Form 982, Reduction of Tax Attributes. But in my experience, if you receive a Form 1099-C for student loan discharge, it’s automatically taxable.

I’m not discussing student loan forbearance or deferment. Modifying the terms of loan shouldn’t trigger cancelled debt income.

“Some Folks get confused about taxable income and the actual amount of tax that’s due. The amount of tax due on your taxable income depends on your marginal tax bracket, the number of exemptions you take, how much income is capital gains, etc.”
– Gary Bode, cancelled debt CPA.

How to Battle a Form 1099-C for a discharged student loan: tax reporting rules for cancelled student loan debt

Insolvency for Form 982 purposes is a financial snapshot just before the loans were cancelled. The IRS insolvency worksheet is in IRS Publication 4681. Don’t bother with the Form 982 instructions. Publication 4681 is better at explaining Form 982 than the Form 982 instructions are.

  • Be aware that Form 982 may not be a free ride.
    • Look at the Reduction of Tax Attributes section in Publication 4681.
    • While Reduction of Tax Attributes won’t affect the current return, you may have future tax consequences and you should understand how that can manifest itself.
  • The only way to exclude student loan cancellation from taxable income is through the Insolvency exclusion of Form 982, Reduction of Tax Attributes.
    • Some student is dischargeable by working in underserved geographical areas and those Folks usually don’t receive Form 1099-C, Cancellation of Debt.
    • If that’s you, and you still receive a Form 1099-C,  we can help you straighten that out with the IRS.
  • Calculate your Insolvency using the IRS Insolvency Worksheet.
    • If your IRS Insolvency is equal or greater than the student loan forgiveness listed on 1099-C, you enter the dollar amount listed Form 982.
      • Complete Form 982 and attach it to your tax return.
      • Remember to reduce your tax attributes if required.
        • With any type of cancelled debt there’s always a chance of future tax consequences. But note that seldom applies to student loan cancelled debt.
        • If your IRS Insolvency is less than the student loan discharge you only exclude the amount of insolvency shown in the IRS Insolvency Worksheet.
          • The insolvency part flows to Form 982 and isn’t directly taxable. If you’re only partly insolvent, the remainder of the amount listed on Form 1099-C flows to Line 21 of Form 1040 and becomes taxable income.
        • Here’s what goes in Line 21 of Form 1040:
          • The amount in Box 2 of Form 982, Cancellation of Debt, minus the IRS Insolvency amount from the worksheet.
    • If your IRS insolvency is $0 or less than $0, all the cancelled student loan debt in Box 2 of Form 1099-C is taxable and flows to Line 21 of Form 1040.

Sources of help for cancelled student loan tax reporting

  • Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. I think most Form 1099-C CPAs would agree this publication is the real Form 982 instructions, Reduction of Tax Attributes.
  • Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, contains the IRS insolvency worksheet.
  • The IRS. Remember you can’t use oral advice from the IRS as a defense against an inaccurate tax return. And they’ve drastically cut down on customer service for 2018.
    • In 2016 there is a proposal to charge the taxpayer for IRS help. That hasn’t happened yet. The IRS has long maintained that oral advice from them can’t be relied on for tax return preparation.
  • IRS Form 982 instructions. Even cancelled debt CPAs use tax data bases to avoid reading the IRS 982 instructions.
    • I read Publication 4681 every year but not the Form 982 instructions or the Form 1099-C instructions.
  • Form 982 instructions simultaneously provide too much and/or too little info to be helpful – go figure.
  • Form 1099-C instructions. These are for the lender not the taxpayer.
  • A free consult from me. (910) 399-2705. There are quirks with IRS insolvency and the IRS insolvency worksheet.
  • Tax software. Most consumer tax software programs don’t handle student loan cancelled debt and insolvency directly.
    • Usually there’s a manual work around, but you have to know what you’re doing.

Cancelled Debt CPA with a Virtual Office

There’s at least 100 posts on this website discussing various aspects of cancelled debt, Form 1099-C, the IRS Insolvency Worksheet, Form 982, etc. If you like what you read consider calling for a free consult. Distance isn’t a factor for preparing your cancelled debt tax return.

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