"We first selected Gary Bode because of his familiarity with a creative financing scheme for our new small business. During our time with Gary, his insights have helped us better structure our small businesses, save money, and learn to be better small business managers. When it comes to small business accounting, a little hand-holding goes a long way."—Justin and Joelle LeBlancCongratulations on your student loan cancellation. But now the IRS assumes the cancelled debt is taxable income - ouch! If you need help with Form 982, call for a free phone consult: (910) 399-2705.
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.
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Here’s the 2012 Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) .
At age 65, I received a 1099-C for $102,000—the result of student loan forgiveness due to permanent disability. As of the date of loan discharge, I was insolvent: $2,250 assets; $18,000 liabilities.
My SSDI ended a few months later when I turned 66 and began receiving regular social security. A few months later, my husband (age 68) was diagnosed with terminal leukemia.
He filed his own 2012 separately to protect our house (in his name only). I requested an extension to today, October 15.
So far, I have done the following:
Checked:1-b in Part I.
Selected: 10a: Should I put the $15,750 in this line?. Is this right figure?
I am using TurboTax 2012 “Attachment to Form 982” to describe assets and calculate ‘basis after reduction”
(1) I’ll attach Form 982 with the Attachment to my return, but how can I reduce my adjusted gross income, line 37, using an automated, “fill-in-the blanks” tax program like TurboTax. It does not automatically subtract 982 data from line 37 or anywhere else on a 1040. You mentioned line 27. But this is for self employment tax and requires an entirely different form.
(2) I’ve read on your blog that the ENTIRE amount of the 1099-C can be eliminated. Can this be done? How? Under what circumstances?
(3) I know I shouldn’t “self prepare” on this issue. I am certainly not capable of doing this right.
But I am running out oftime. I am caring for my husband (and disabled son) full time and this has left precious little time for grappling with 982 and 2012 taxes. Can I file a 1040X to correct mistakes in the 982?
Sorry to be so late with this question.
Thanks,
Ewa M.
(802) 748-8060 (Vermont)
Hi Ewa: your question extends beyond the nature of general advice for cancelled debt. After you file you can amend the return. I wish you the best.