Many students who have graduated and owe student loans find themselves in a position where they cannot work and this is usually due to a permanent disability.  With no income coming in, these graduates realize that they are in a position where it is impossible to pay back the student loans they used to further their education.  Some are aware, many others are not, that you can have these student loans discharged.  Discharging one’s student loans means that they are unable to pay back these loans and so they are looking to discharge this debt or obligation.  For those of you who are not aware of this process it is easy to find the forms needed online and complete them yourself at no cost.  It is a process that does take time but if you are truly in a position of not being able to pay back these loans, say because you have become disabled, it may be worth your while to investigate.

If you are entitled to have these student loans discharged and are informed that the process is taking place, I am sure that you must be relieved.  However, hold back because if your student loans are discharged it does mean that the total of your student loans are considered income in the year that the loans are discharged.  What this means is that you will receive a 1099-A slip for income tax purposes.  For most, they fear the worse.  This means that they may owe considerable tax to the IRS.

What many do not know is that the IRS has two documents that you may use in order to lessen this tax burden.  The first form you need to complete is a Insolvency Worksheet.  This worksheet asks the date of your discharge, which is the date on your 1099-A form and what debts, including your student loans, did you have at the time of this discharge.  It also asks you what assets you had at the same time.  If your debt is higher than your assets, then you will be able to reduce the amount of tax you will have to pay on the discharge of your student loan income.  The second document is called a Form 982 (Reduction of Tax Attributes Due to Discharge of indebtedness).  Both of these documents are available right on the IRS website.  I highly recommend reading the instructions carefully before completing these documents.

Once you have completed both of these forms, I would strongly recommend taking your tax return to a tax specialist to be completed.  A good tax specialist will be able to determine what amount of the discharge  you will be taxed on.

Although this procedure sounds complicated, rest assured that the process is well worth the time and cost of a tax expert.  For example, instead of paying $10,000 in tax over a $40,000 student loan discharge, you may only be responsible for the tax on $8,000 amount of your $40,000 student loan discharge.

A process well worth looking into if your only income is disability.

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