Nontaxable Cancelled Debt?

[Justataxguy]

Got a call today from a 76 year old disabled woman. She went to college at age 68, took out student loans, 3 years into college had a hip replacement, that ended college. Loans were deferred due to disability, this year she gets a 1099C for cancelled debt. She is getting conflicting info on whether or not it is taxable. On page 14-18 of the TaxBook, it states under "Nontaxable Cancellation of Debt Income" that "Payment of a liability that would have given rise to a deduction" is nontaxable. Since the student loan interest would give rise to a deduction, is it safe to assume this is nontaxable cancelled debt?

[erchess]

Based on your cite

my thought would be that the forgiven debt does not qualify as nontaxable under the rule you are trying to use. Perhaps the interest would qualify but good luck determining how much of what she owes is interest.

On the other hand, just because the money is not nontaxable under one rule does not mean that there is no rule under which it is nontaxable. What other rules have you considered? I am thinking that she may have been insolvent immediately before the debt was forgiven. Or perhaps if she does owe the tax but given her income cannot pay it she could be eligible for currently not collectible status or even an offer in compromise. You have an interesting case here and if you want you my private message me to share details you can't post on a bulletin board. I can start by giving you the form she would need to sing before you gave me such details.

[Roland Slugg]

It is puzzling that you would read that and then conclude that the entire amount is non-taxable. The principal that was canceled is certainly taxable. The status of the interest is less clear, since at most only $2,500 of student loan interest is deductible in any one year.

The amount reported on form 1099-C, however, probably doesn't include any interest ... although it could. It's not required to be reported, and if it is, it should appear in Box 3 of the form.

If the woman filed bankruptcy or was insolvent, then all or part of the COD income would be non-taxable.

[Roberts]

The US Treasury reviewed several different types of student loan forgiveness and loan cancellation provisions in a September 19, 2008 letter to Representative Sander Levin.

The letter specifies that the following types of student loan forgiveness are not taxable:

Public Service Loan Forgiveness (Section 455(m)(2) of the Higher Education Act of 1965)
Teacher Loan Forgiveness (Sections 460 and 428J of the Higher Education Act of 1965)

On the other hand, the letter also specifies that the following other types of student loan discharges do represent taxable income:

Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965)
Closed School, False Certification and Unpaid Refund Discharge (Section 437(c) of the Higher Education Act of 1965)
Closed School Discharge (Section 464(g) of the Higher Education Act of 1965)
Income-Contingent Repayment (Section 455(e) of the Higher Education Act of 1965)
Income-Based Repayment (Section 493C(b)(7) of the Higher Education Act of 1965)

Note that the forgiveness associated with the income-contingent repayment (ICR) and income-based repayment (IBR) programs can be excluded from income in certain situations and is taxable in others.

[Bonnie]

Amazed that at 68 she had to take out loans. In Kentucky after you turn 65 you can go to state schools for free.

[DaveO]

So COD is non-taxable if you are broke but not if you are dead? I'm looking at a 1099C for student loans issued to the deceased spouse of one of my clients. Will this really be taxable income to her? She is not liable on the loan but I would like to file a joint return for them (he died in 2012). Can I file them seperate to avoid the COD?