Hi, I’m a CPA discussing tax consequences and tax reporting rules for student loan cancelled debt. Common terms include student loan forgiveness, student loan cancellation and student loan discharge. Your obligation to pay the student loan disappears. Generally the lender issues a Form 1099-C, Cancellation of Debt. The amount of student loan forgiveness appears in Box 2 of Form 1099-C. This may not discharge all the student loan.
The 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 Form 982, Reduction of Tax Attributes. How much tax does that generate? Maybe 20-30% of the amount in Box 2 of Form 1099-C. Under certain conditions your student loan cancelled debt isn’t taxable. But in my experience, if you receive a Form 1099-C for student loan discharge, it’s automatically taxable.
There’s a great comprehensive tax preparation example for student loan discharge at www.form982.com.
I’m not discussing student loan forbearance or deferment. Modifying the terms of loan shouldn’t trigger cancelled debt income.
How to Battle a Form 1099-C for a discharged student loan: tax reporting rules for cancelled student loan debt
- The only way to exclude student loan cancellation from taxable income is through the Insolvency exclusion of Form 982, Reduction of Tax Attributes.
- Calculate your Insolvency using the IRS Insolvency Worksheet.
- If your IRS Insolvency is equal or greater than the student loan forgiveness, you enter $0 on Line 21 of Form 1040.
- Complete Form 982 and attach it to your tax return.
- Remember to reduce your tax attributes if required.
- If your IRS Insolvency is less than the student loan discharge you only exclude the amount shown in the IRS Insolvency Worksheet.
- 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.
- Complete Form 982.
- Remember to reduce your tax attributes if required.
- If your IRS Insolvency is equal or greater than the student loan forgiveness, you enter $0 on Line 21 of Form 1040.
Sources of help for cancelled student loan tax reporting
- Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
- The IRS. Remember you can’t use oral advice from the IRS as a defense against an inaccurate tax return.
- IRS Form 982 instructions.
- A free consult from me. (910) 399-2705.
- A comprehensive tax preparation example for cancelled student loan debt.
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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Hi Gary,
I’ve been researching insolvency on yours and many other websites as my wife received a 1099-c for some forgiven student loans. We were actually married on 12/22/13, and the date of forgiven debt on the 1099-c is 12/31/13 even though she received a formal letter indicating forgiveness back in May 2013.
Anyway, I would really like to hear your take on PLR 8920019 regarding counting a spouses assets in the insolvency calculation. I first found out about it here: http://www.taxalmanac.org/index.php/Discussion:Cancelled_debt_attributed_to_one_taxpayer,_but_filing_joint
Thanks for getting info out there about this complex topic!
I appreciate the offer Jeff but I have my own research material and am well acquainted with the topic.
Hello Gary. My wife’s student loans were discharged in 2011 due to disability (a TPD). We did not find out until this year, when the IRS contacted us, that the discharged debt was taxable. Now we have a huge tax bill as they added penalties and iterest going back to 2012.
As part of the TPD process, my wife is under a 3 year Monitoring Period. If she has income above the poverty level during that time her loans are reinstated. My question is, what are tax implications of the loans being reinstated? Will the IRS go back and cancel the discharged debt (not count as income) and adjust our taxes accordingly?
Thanks in advance,
Dennis
Hi Dennis. I’d amend the 2011 and or 2012 tax return to include the Form 1099-Cs, Cancellation of Debt, and Form 982, Reduction of Tax Attributes. You’d use the insolvency exclusion of Form 982 by completing the IRS Insolvency Worksheet. I hope your actual question disappears with that.