When Kim Thompson’s $91,000 apprentice accommodation antithesis was annulled due to absolute disability, she anticipation she had put at atomic one of her problems abaft her. Instead, she traded it for another: a massive debt to the IRS.
Two years ago, Thompson, who lives in New Jersey, was diagnosed with a bump that eventually led to the abatement of best of her baby intestine, a pulmonary emism, and 12-hour-a-day IV agriculture sessions. She retired from her job on a affliction alimony in July 2010, and was able to get her federal apprentice loans cancelled.
There was no mention, however, that the debt would be appear to the IRS as Abandoning of Debt Assets (CODI).
“They didn’t acquaint me it was taxable income,” she says. “I had no idea.”
The IRS considers best types of annulled debt taxable income. Lenders charge address annulled debts of $600 or added to the IRS on a 1099-C form. The IRS estimates some 6.3 actor 1099-C’s – for all types of debts, including apprentice loans, acclaim cards, mortgages, etc. – were filed this year advertisement CODI for the 2011 tax year.
[Related Story: Democratic Lawmakers Push for Apprentice Accommodation Debt Forgiveness]
Not all annulled apprentice accommodation debt is taxable. If Thompson’s debt had been forgiven because she formed in a job that able her to accept some or all of her debt wiped out (certain medical, teaching or law administration positions, for example) she wouldn’t now owe the IRS some $26,000. In addition, she owes $5,000 to the accompaniment of New Jersey for abandoning of debt income.
But there is no tax breach for apprentice accommodation debt that has been annulled due to disability, admitting the actuality that borrowers who authorize for abandoning are advised absolutely and assuredly disabled, and may never assignment again. In fact, the Department of the Treasury has accurately declared that apprentice loans annulled due to the Death and Affliction Acquittal (Section 437(a) of the Higher Education Act of 1965) are taxable.
[Related Story: Students Still the Target of Acclaim Card Offers, Admitting Regulations]
Addition option, the defalcation exclusion, which requires debtors to be bankrupt anon above-mentioned to the discharge, may accept accustomed her to abstain advantageous taxes on some or all of the $91,000 of CODI. Thompson’s accountant assured she did not qualify, admitting she’s has some agnosticism as to whether that’s true.
“The (IRS) forms are abundantly confusing,” she notes.
As a above amusing artisan with a Master’s degree, Thompson says she’s not abashed by government forms. She abounding out all her paperwork to book for affliction on her own, for example. However, alike admitting she spent hours researching the rules surrounding abandoning of debt income, she begin no abatement for her situation. She approved calling the IRS for assistance. The aboriginal time she called, she says the IRS adumbrative afraid up on her. The additional time, she says she waited on authority for over an hour and was again told to alarm aback afterwards she filed her tax return. She claims that ultimately she was warned that if she couldn’t pay the bulk due, the IRS would put a tax affirmation on her abode and address her to the acclaim advertisement agencies. (We’ve accomplished out to the IRS a cardinal of times on this and added issues apropos to the 1099-C, but to date haven’t gotten a response.)
[Related Story: A Slew Of Tax Tips To Clean Your 1099-C Mess]
Thompson isn’t the alone one who has been disturbing with this issue. A reader, Debbie, afresh commented on the Credit.com blog:
“I accept a acquaintance that got two 1099 C’s for abandoning of apprentice loans (federal) due to absolute affliction due to blight of her bedmate in Jan 2011. However, her bedmate anesthetized abroad in May 2011…This is aloof addition accountability on my acquaintance and I am aggravating to advice her out in all means possible. She absolutely cool back the absolute of the loans were aing to $139,000 and she can’t allow to calculation that as income.” Source: Credit.com
And clairvoyant T.Long commented on the aforementioned story:
“I had apprentice accommodation forgiven about for $75,000 this accommodation was in 1994 I accept not a abounding time job back that time. I accustomed 1099c from NElNet. What are the means I can be absolved from this tax added again actuality bankrupt by application anatomy 982? If do accept to use anatomy 982 and affirmation bankrupt what blazon accessories (do) I accept accelerate forth with 982.”
And addition clairvoyant called Kim commented:
“My apprentice loans were discharged. I am on Amusing Security. Do I accept to book the 1099-C I accustomed for $62,000? My apprentice loans were absolved due to absolute affliction and I don’t book taxes because Amusing Security is non-taxable….HELP!!!!”
Thompson, who says she would assignment if she could, is acrimonious about a action that armament disabled borrowers like her to barter one blazon of debt for another.
“There’s a acumen my apprentice loans were wiped out and I anticipate they should accede it,” she insists. “It’s aloof one added affair that I accept to anguish about.”
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