Many disabled persons receive a 1099-C form from the IRS after having student loan debts forgiven. The IRS is burdening disabled persons on a fixed income by charging taxes on the forgiven debt. The creditor(s) is required to report the forgiven debt to the IRS. This debt is due by April 15th of the current year. Many citizens have been threatened by the IRS with liens against homes and/or being reported to credit reporting services for non-payment of taxes.
- A competent tax advisor may complete a form 982, if liabilities exceed a person’s income. This form can eliminate tax due on student loan forgiveness. The amount of liabilities that exceeds the person’s assets may be forgiven. The person will usually be responsible for the portion of the IRS charges that does not exceed the person’s assets.
- It is possible to have the IRS debt completely canceled after three years by filing for bankruptcy. No tax liability will be owed in the process.
- Former students whose occupation falls into one of the following categories: military related, education, National Health Service Corps or law school loans may not be required to pay taxes on discharged student loans.
- A person may be required to pay taxes on loans that were discharged due to a college or university closing, false certifications or unpaid refunds.
- Some people have had Perkins Loans discharged in exchange for service. It is possible to avoid paying taxes on an education loan discharged in lieu of service by speaking to an experience tax advisor.
- The State of Pennsylvania does not tax discharged student loans. Most states do levy a tax on forgiven student loans. It is best to check with a loan advisor in state of residence.
- The IRS ruled in September of 2008, that the following types of student loan forgiveness were nontaxable: Public Service Loan Forgiveness (Section 455(m) (2) of the Higher Education Act of 1965 and Teacher Loan Forgiveness (Sections 460 and 428J of the Higher Education Act of 1965.
- There are currently contingents proposed for consideration of other nontaxable student loan forgiveness options. Always consult a professional tax advisor for the state of residence.