taxes

Owe taxes on forgiven student loan?

Judy O'ConnorDear Tax Talk,
My school loan in the amount of $53,000 was forgiven, but I have not received Form 1099 showing this as income. Will I owe taxes on the forgiven student loans? Is there a way that I can lower the amount of taxes since I have already filed and received my 2013 tax overpayment? I am a 100 percent disabled veteran. Can this help me in any way?
-- Michael

Dear Michael,
Thank you for the tremendous sacrifice you made for our country. Unfortunately, while your veteran disability qualified you for student loan debt forgiveness, it does not help you with the IRS requirement that you report this as income. However, in certain circumstances, you may not owe much tax on the student loan debt that was canceled.

Graduation cap and money © lenetstan/Shuttersstock.com

The general rule for student loans is that you must include the canceled debt in your income unless your loan was made by a qualified lender and the loan contains a provision that all or some of the debt will be canceled if you work in certain professions for a specified time period for certain employers. This is not your situation, so let's move on to what might help you.

Under the general rules for all canceled debt, once again you must include the debt in your income; however there are certain provisions where the debt can be excluded. If you were "insolvent" at the time this debt was canceled, then this may help you. Insolvent means your liabilities exceeded your assets. To the extent that it did in your case, that amount of the debt can be excluded from your income. Be sure to include the amount of the debt as a liability when you are tallying everything up. You will need to acquaint yourself with IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, as this is where the debt is excluded if applicable.

Thank you for the question and I hope this information is of use to you. All the best to you as you move forward with your life.

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