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Dear Tax Talk,

My husband is 77 years old and has stage 4 lung cancer. He has a student loan that he received long before we married. Recently, because of his age and health, the loan ($32,000) was forgiven. But on the discharging paper, it says this amount will be added to our income. Is there any provision in the law about tax relief for an innocent spouse? Thank you!

— Tatyana

Dear Tatyana,

There are provisions in the law regarding “innocent spouse relief.” However, this relates to income not reported properly on a joint return, so it will not help you in your situation.

The student loan forgiveness will be reported to you on Form 1099-C, Cancellation of Debt. You will need to take a look at IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to see if you can find some relief under the insolvency exclusion.

What is the insolvency exclusion?

The insolvency exclusion applies if you were insolvent to the extent your liabilities exceeded the fair market value of your assets immediately before the student loan debt was canceled.

You will need to be prepared to show the IRS your calculation if you’re asked, so be sure to keep good records as you complete the form.

Not everyone is insolvent when debt is canceled. However, they still have other circumstances that prevent them from being able to pay the IRS what they owe. The IRS recognizes this and allows taxpayers to submit an offer in compromise, which is basically an agreement between you and the IRS to settle your tax debt for less than you owe using IRS Form 656, Offer in Compromise.

The IRS also offers professional tax assistance at low-income taxpayer clinics if you qualify. They are listed in IRS Publication 4134, Low Income Taxpayer Clinic List.

Thank you for the great question and all the best to you and your husband.

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