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Topic: Discharged Student Loans and Taxes  (Read 9110 times)
SSDAdmin
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« on: April 07, 2012, 04:09:35 PM »

HI all,

I know we have a great post going on this site, thanks to Prince, regarding the discharge of student loans to those that are disabled.

There was a recent article regarding the tax ramifications of this and I have linked and copied it below:

Canceled debt may mean big tax bill

If your student loan debt is canceled, even because of disability, expect a bill from the IRS. The agency considers forgiven debt of all kinds taxable income.
By MSN Money partner Fri 2:28 PM
This post is by Gerri Detweiler of Credit.com.
   
When Kim Thompson’s $91,000 student loan balance was canceled because of total disability, she thought she had put at least one of her problems behind her. Instead, she traded it for another: a massive debt to the Internal Revenue Service.
 
Two years ago, Thompson, who lives in New Jersey, was diagnosed with a tumor that eventually led to the removal of most of her small intestine, a pulmonary embolism and 12-hour-a-day IV feeding sessions. She retired from her job on a disability pension in July 2010 and was able to get her federal student loans canceled.
 
There was no mention, however, that the debt would be reported to the IRS as Cancellation of Debt Income.
 
"They didn't tell me it was taxable income," she says. "I had no idea."
 
The IRS considers most types of canceled debt taxable income. Lenders must report cancelled debts of $600 or more to the IRS on a 1099-C form. The IRS estimates some 6.3 million 1099-Cs -- for all types of debts, including student loans, credit cards, mortgages, etc. -- were filed for the 2011 tax year.
 
Not all canceled student loan debt is taxable. If Thompson's debt had been forgiven because she worked in a job that qualified her to have some or all of her debt wiped out (certain medical, teaching or law-enforcement positions, for example) she wouldn't now owe the IRS some $26,000. In addition, she owes $5,000 to the state of New Jersey for cancellation of debt income.

But there is no tax break for student loan debt that has been cancelled due to disability, despite the fact that borrowers who qualify for cancellation are considered totally and permanently disabled, and may never work again. In fact, the Department of the Treasury has specifically said that student loans canceled due to the Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965) are taxable.
 
Another option, the insolvency exclusion, which requires debtors to be insolvent immediately prior to the discharge, may have allowed her to avoid paying taxes on some or all of the $91,000 of the cancelled debt. Thompson's accountant concluded she did not qualify, though she has some doubt.
 
"The (IRS) forms are incredibly confusing," she notes.
 
As a former social worker with a master's degree, Thompson says she’s not intimidated by government forms. She filled out all her paperwork to file for disability on her own, for example. However, even though she spent hours researching the rules surrounding cancellation of debt income, she found no relief for her situation.
 
She tried calling the IRS for assistance. The first time she called, she says, the IRS representative hung up on her. The second time, she says she waited on hold for more than  an hour and was then told to call back after she filed her tax return. She says that ultimately she was warned that if she couldn't pay the amount due, the IRS would put a tax lien on her house and report her to the credit-reporting agencies. (We've reached out to the IRS a number of times on this and other issues relating to the 1099-C, but to date haven't gotten a response.)
 
Thompson isn’t the only one who has been struggling with this issue. A reader, Debbie, recently commented on the Credit.com blog:
I have a friend that got two 1099 C's for cancellation of student loans (federal) due to total disability due to cancer of her husband in Jan 2011.  However, her husband passed away in May 2011…This is just another burden on my friend and I am trying to help her out in all ways possible.  She really freaked since the total of the loans were close to $139,000 and she can’t afford to count that as income.

 And reader T. Long commented on the same story:
I had student loan forgiven around for $75,000. This loan was in 1994. I have not had a full-time job since that time. I received 1099-C from NElNet. What are the ways I can be exempt from this tax other than being insolvent by using form 982? If do have to use form 982 and claim insolvent what type attachments (do) I have send along with 982?

And another reader named Kim commented:
My student loans were discharged. I am on Social Security. Do I have to file the 1099-C I received for $62,000? My student loans were discharged due to total disability and I don’t file taxes because Social Security is non-taxable….HELP!!!​!

Thompson, who says she would work if she could, is indignant about a policy that forces disabled borrowers like her to trade one type of debt for another.
 
"There's a reason my student loans were wiped out, and I think they should consider it," she says. "It's just one more thing that I have to worry about."

http://money.msn.com/tax-tips/post.aspx?post=106d27c7-03df-4ef2-9bb9-ee9e8fbad598
Logged

I speak from experience not expertise.
Name: Marci
Location: Florida
Age at Application: 35
Disability: Arthritis, Degenerative Disc, Migraines, Foot Injury
Date Applied: September 2005
First Approval/Denial Date: Denied February 2006
Reconsideration Approval/Denial Date: Denied October 2006
Date Hearing Notice Received: October 2008 two weeks before hearing
Hearing Date: October 2008
ALJ Approval/Denial Date: Letter Received December 2008
Date Award Letter Received: January 2009
Date Back Pay Received: February 2009
Additional Info: Approved at hearing, no Attorney
prince1969
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People helped 3
Posts: 1029


« Reply #1 on: April 07, 2012, 06:39:41 PM »

Trying to call someone and find some answers on this subject is not easy at all. I called Nelnet who handles the discharge process and the lady specifically told me that I wouldn't have to pay taxes on the discharged amount. That was only true if I was insolvent as I discovered later. Fortunately, I was insolvent at the time and filled out the correct form documenting that. I would have had to pay around $25,000 in taxes if I had not been. Of course, I don't have $25,000 to pay the IRS. I received my 1099-c this year for 2011.

It is clearly a double edge sword for some people especially if you have some assets worth something. The lady in this story and/or her husband would have had to have substantial assets not to qualify for at least partial insolvency. Unfortunately, the rules regarding the insolvency are very complex and even some CPAs or attorneys may not figure it out correctly.

Something is wrong when you get your student loans discharged for being disabled only to have to possibly pay the IRS a large amount of taxes which may put you in a worst situation that you were in before. Several legislators have discussed addressing this problem but nothing has happened so far.
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SSDAdmin
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People helped 332
Gender: Female
Posts: 14811



« Reply #2 on: April 07, 2012, 08:12:07 PM »

Prince,

I know you have been very open about this process with everyone and appreciate all you have done.  I can't verify anything in this article but felt it was important to throw it out there so people can do their due diligence.

Marci
Logged

I speak from experience not expertise.
Name: Marci
Location: Florida
Age at Application: 35
Disability: Arthritis, Degenerative Disc, Migraines, Foot Injury
Date Applied: September 2005
First Approval/Denial Date: Denied February 2006
Reconsideration Approval/Denial Date: Denied October 2006
Date Hearing Notice Received: October 2008 two weeks before hearing
Hearing Date: October 2008
ALJ Approval/Denial Date: Letter Received December 2008
Date Award Letter Received: January 2009
Date Back Pay Received: February 2009
Additional Info: Approved at hearing, no Attorney
prince1969
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People helped 3
Posts: 1029


« Reply #3 on: April 07, 2012, 08:34:31 PM »

I agree it is important to put the information out there.
Logged
Audarah
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Posts: 31


« Reply #4 on: April 19, 2012, 02:16:54 PM »

Eh oh. How do I make sure I fill out the forms for insolvency? Really I own nothing at all, have no stocks, bonds etc and am currently waiting on whether or not they will discharge them. This is ridiculous!
Logged
Name: Jodie
Location: Pennsylvania
Age at Application: 35
Disability: COPD, Asthma, Narcolepsy,Trigeminal Neuralgia, Stroke, Post Stroke Syndrome, Foreign Accent Syndrome, Depression and Anxiety, Anesthesia Dolorosa (severe pain), Obstructived Sleep Apnea, Sphincter of Oddi Dsyfunction
Date Applied: October 28, 2011
First Approval/Denial Date: Approval: First try, no attorney April 23,2012
jasjohnascar
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People helped 1
Gender: Female
Posts: 256


« Reply #5 on: April 19, 2012, 02:50:52 PM »

I need help, also on this subject because I have 4 college degrees from as far back as the 80s . . . I have a Sallie Mae due in June, but hopefully can defer....help???
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Location: Kentucky (across the river from Cincinnati) !!!
Age at Application: 50
Disability: fibro, rheumatic arthritis, depression, anxiety & panic disorder, PTSD, gout
Date Applied: August 2007
First Approval/Denial Date: Denied at initial level December 2008
ALJ Approval/Denial Date: ALJ denial November 2010
Date Award Letter Received: January 2012
Date Back Pay Received: May 2012
Additional Info: Filed 2nd claim Sept 2010; awarded on Jan 2012!!! Received monthly check in February 2012 and finally received backpay middle of May!
SSDAdmin
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People helped 332
Gender: Female
Posts: 14811



« Reply #6 on: April 19, 2012, 03:10:11 PM »

Did you check out this thread yet?  I think it covers most of the process.

http://ssdfacts.com/forum/index.php/topic,2235.0.html
Logged

I speak from experience not expertise.
Name: Marci
Location: Florida
Age at Application: 35
Disability: Arthritis, Degenerative Disc, Migraines, Foot Injury
Date Applied: September 2005
First Approval/Denial Date: Denied February 2006
Reconsideration Approval/Denial Date: Denied October 2006
Date Hearing Notice Received: October 2008 two weeks before hearing
Hearing Date: October 2008
ALJ Approval/Denial Date: Letter Received December 2008
Date Award Letter Received: January 2009
Date Back Pay Received: February 2009
Additional Info: Approved at hearing, no Attorney
prince1969
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People helped 3
Posts: 1029


« Reply #7 on: April 20, 2012, 06:51:27 AM »

Eh oh. How do I make sure I fill out the forms for insolvency? Really I own nothing at all, have no stocks, bonds etc and am currently waiting on whether or not they will discharge them. This is ridiculous!

They are somewhat complicated although you will think it would be more simple. I am still not sure if I did it right. I did the first part right but you also have to adjust the basis in any assets you may have. Might not be a bad idea to see a CPA or tax attorney if you can afford it.
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Audarah
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Posts: 31


« Reply #8 on: April 21, 2012, 08:40:15 PM »

where do i get them from?
Logged
Name: Jodie
Location: Pennsylvania
Age at Application: 35
Disability: COPD, Asthma, Narcolepsy,Trigeminal Neuralgia, Stroke, Post Stroke Syndrome, Foreign Accent Syndrome, Depression and Anxiety, Anesthesia Dolorosa (severe pain), Obstructived Sleep Apnea, Sphincter of Oddi Dsyfunction
Date Applied: October 28, 2011
First Approval/Denial Date: Approval: First try, no attorney April 23,2012
prince1969
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People helped 3
Posts: 1029


« Reply #9 on: April 22, 2012, 01:15:27 AM »

where do i get them from?

Not sure what you are referring to but the forms are on the IRS site or you can do a search on the internet. I believe it is irs form 982.
Logged
Audarah
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Posts: 31


« Reply #10 on: April 23, 2012, 11:43:03 PM »

Sorry LOL I did mean what form was it, but you told me and I looked it up so thank you. I JUST received a letter from AES today saying the terms of my master promissory note were cancelled due to disability on 4/15/12. I called AES and asked a rep what that form meant, and she said the file was going to the Dept of Education but that it was fully discharged. Yeah right, until the IRS contacts me. Good thing I don't own anything at ALL except a 1998 Dodge Ram pickup truck. Do we have to file the 982 every year for three years or just once? Anyone know?

Also: If you get married, does your spouses income count towards the poverty level for two? My BF makes 140,000.00 a year so I was curious if they would count HIS income and reinstate the loans.
Logged
Name: Jodie
Location: Pennsylvania
Age at Application: 35
Disability: COPD, Asthma, Narcolepsy,Trigeminal Neuralgia, Stroke, Post Stroke Syndrome, Foreign Accent Syndrome, Depression and Anxiety, Anesthesia Dolorosa (severe pain), Obstructived Sleep Apnea, Sphincter of Oddi Dsyfunction
Date Applied: October 28, 2011
First Approval/Denial Date: Approval: First try, no attorney April 23,2012
prince1969
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People helped 3
Posts: 1029


« Reply #11 on: April 24, 2012, 12:01:07 AM »

They only look at your earned wages during the monitoring period. SSDI or SSI doesn't count since they are not wages. You only have to file form 982 the year they send you the 1099-c if you are insolvent. Now if you were married, your husband's assets probably would be considered yours as well.

You can check on disabilitydischarge.com to determine your true status. AES may consider your loans to be discharged but there may still be a process once they are transferred to presumably Nelnet. If they are just being transferred, your info might not be available on that website.
Logged
mesa girl
SSDFacts VIP
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People helped 1
Posts: 77


« Reply #12 on: April 24, 2012, 02:20:40 AM »

This subject shows why the IRS is even slimier than SSA or other Fed agencies. SLIMY.  argue argue argue argue argue argue argue argue argue argue argue argue argue argue argue argue poke poke poke poke poke poke poke poke poke poke poke poke poke poke zip zip


HI all,

I know we have a great post going on this site, thanks to Prince, regarding the discharge of student loans to those that are disabled.

There was a recent article regarding the tax ramifications of this and I have linked and copied it below:

Canceled debt may mean big tax bill

If your student loan debt is canceled, even because of disability, expect a bill from the IRS. The agency considers forgiven debt of all kinds taxable income.
By MSN Money partner Fri 2:28 PM
This post is by Gerri Detweiler of Credit.com.
   
When Kim Thompson’s $91,000 student loan balance was canceled because of total disability, she thought she had put at least one of her problems behind her. Instead, she traded it for another: a massive debt to the Internal Revenue Service.
 
Two years ago, Thompson, who lives in New Jersey, was diagnosed with a tumor that eventually led to the removal of most of her small intestine, a pulmonary embolism and 12-hour-a-day IV feeding sessions. She retired from her job on a disability pension in July 2010 and was able to get her federal student loans canceled.
 
There was no mention, however, that the debt would be reported to the IRS as Cancellation of Debt Income.
 
"They didn't tell me it was taxable income," she says. "I had no idea."
 
The IRS considers most types of canceled debt taxable income. Lenders must report cancelled debts of $600 or more to the IRS on a 1099-C form. The IRS estimates some 6.3 million 1099-Cs -- for all types of debts, including student loans, credit cards, mortgages, etc. -- were filed for the 2011 tax year.
 
Not all canceled student loan debt is taxable. If Thompson's debt had been forgiven because she worked in a job that qualified her to have some or all of her debt wiped out (certain medical, teaching or law-enforcement positions, for example) she wouldn't now owe the IRS some $26,000. In addition, she owes $5,000 to the state of New Jersey for cancellation of debt income.

But there is no tax break for student loan debt that has been cancelled due to disability, despite the fact that borrowers who qualify for cancellation are considered totally and permanently disabled, and may never work again. In fact, the Department of the Treasury has specifically said that student loans canceled due to the Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965) are taxable.
 
Another option, the insolvency exclusion, which requires debtors to be insolvent immediately prior to the discharge, may have allowed her to avoid paying taxes on some or all of the $91,000 of the cancelled debt. Thompson's accountant concluded she did not qualify, though she has some doubt.
 
"The (IRS) forms are incredibly confusing," she notes.
 
As a former social worker with a master's degree, Thompson says she’s not intimidated by government forms. She filled out all her paperwork to file for disability on her own, for example. However, even though she spent hours researching the rules surrounding cancellation of debt income, she found no relief for her situation.
 
She tried calling the IRS for assistance. The first time she called, she says, the IRS representative hung up on her. The second time, she says she waited on hold for more than  an hour and was then told to call back after she filed her tax return. She says that ultimately she was warned that if she couldn't pay the amount due, the IRS would put a tax lien on her house and report her to the credit-reporting agencies. (We've reached out to the IRS a number of times on this and other issues relating to the 1099-C, but to date haven't gotten a response.)
 
Thompson isn’t the only one who has been struggling with this issue. A reader, Debbie, recently commented on the Credit.com blog:
I have a friend that got two 1099 C's for cancellation of student loans (federal) due to total disability due to cancer of her husband in Jan 2011.  However, her husband passed away in May 2011…This is just another burden on my friend and I am trying to help her out in all ways possible.  She really freaked since the total of the loans were close to $139,000 and she can’t afford to count that as income.

 And reader T. Long commented on the same story:
I had student loan forgiven around for $75,000. This loan was in 1994. I have not had a full-time job since that time. I received 1099-C from NElNet. What are the ways I can be exempt from this tax other than being insolvent by using form 982? If do have to use form 982 and claim insolvent what type attachments (do) I have send along with 982?

And another reader named Kim commented:
My student loans were discharged. I am on Social Security. Do I have to file the 1099-C I received for $62,000? My student loans were discharged due to total disability and I don’t file taxes because Social Security is non-taxable….HELP!!!​!

Thompson, who says she would work if she could, is indignant about a policy that forces disabled borrowers like her to trade one type of debt for another.
 
"There's a reason my student loans were wiped out, and I think they should consider it," she says. "It's just one more thing that I have to worry about."

http://money.msn.com/tax-tips/post.aspx?post=106d27c7-03df-4ef2-9bb9-ee9e8fbad598
Logged

Nothing about us without us!
Name: mesa girl
Age at Application: over 50
Disability: (CMT peripheral neuropathy), malignant melanoma, osteoporosis, anxiety, depression, lumbar spondylosis
Date Applied: Feb 2012
First Approval/Denial Date: approved without a lawyer: April 2012
PattyBee
SSDFacts VIP
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People helped 7
Gender: Female
Posts: 483



« Reply #13 on: April 24, 2012, 05:34:59 AM »

I have a friend that got two 1099 C's for cancellation of student loans (federal) due to total disability due to cancer of her husband in Jan 2011.  However, her husband passed away in May 2011…This is just another burden on my friend and I am trying to help her out in all ways possible.  She really freaked since the total of the loans were close to $139,000 and she can’t afford to count that as income.



Does this mean that it is possible to have my husbands student loans discharged since I have been found to be disabled?

Logged

Patty Bee
Name: Patty Bee
Location: Virginia
Age at Application: 39
Disability: Depression, Anxiety, DDD, spinal stenosis, herniated discs, morbid obesity, severe sleep apnea
Date Applied: March 24, 2010
First Approval/Denial Date: Denied June 2010
Reconsideration Approval/Denial Date: Denied December 2010
Hearing Date: December 8, 2011
ALJ Approval/Denial Date: Fully Favorable decision received Friday January 13th, 2012! Got backpay on February 8, 2012!
Additional Info: Praise the Lord! Good luck and God bless you all!
prince1969
~ Platinum ~
*

People helped 3
Posts: 1029


« Reply #14 on: April 24, 2012, 07:54:40 AM »

I have a friend that got two 1099 C's for cancellation of student loans (federal) due to total disability due to cancer of her husband in Jan 2011.  However, her husband passed away in May 2011…This is just another burden on my friend and I am trying to help her out in all ways possible.  She really freaked since the total of the loans were close to $139,000 and she can’t afford to count that as income.



Does this mean that it is possible to have my husbands student loans discharged since I have been found to be disabled?



No, the person with the student loans has to be disabled.
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