First, keep in mind you don’t file the 1099-C; the lender does. A copy has already been sent to the IRS. So you must now demonstrate to them that part or all of that “income” is not taxable. How do you do that? By figuring out whether you qualify for an exclusion or an exception, and if you do, filing form 982.
You mention that your student loans were “discharged.” Do you mean discharged in bankruptcy? Or do you mean they were cancelled due to your total disability? If they were discharged in bankruptcy, then read the previous question and answer for more information on how to claim the exclusion for bankruptcy debts.
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If they were cancelled, however, then it’s not quite as simple. According to the IRS, “Generally, if you are responsible for making loan payments, and the loan is cancelled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes.” There is an exception for student loans that were used to attend a qualified educational institution and were cancelled because you worked for a certain period of time in certain professions. (An example would be a doctor who works in a qualified low-income area.) I didn’t find any reference to an exception or exclusion for student loan debt that was cancelled due to disability, though.
However, you may qualify to have part or all of the $62,000 excluded from your income if you are considered by the IRS to be insolvent. You’ll see a simplified example of how that works on our Infographic: What to Do If You Get a 1099-C. Review Form 982 and the instructions to see if you feel comfortable filling it out yourself. If not, your disability may qualify you for free or low-cost tax help through the Volunteer Income Tax Assistance Program.
Please keep in mind that I am a credit expert, not a tax expert, and the information in this post is strictly for educational purposes. See a tax professional or contact the IRS for help with your individual situation!
Gerri Detweiler Credit.com's Personal Finance Expert, Gerri focuses on financial legislation, budgeting, debt recovery and consumer savings information. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.comTalk Credit Radio. Reach Gerri at firstname.lastname@example.org.
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