Student Loan Success, But Taxable Income? Plus Boo Sallie Mae :(

[hedgey]

Like I said in my other post on my mental health, I'm a pinball today.

In my drive to do anything to avoid meeting with another human being, I googled some more about Student Loan discharges and tax-ability of forgiven loans. I came across this link:

http://www.finaid.org/loans/forgivenesstaxability.phtml

and this statement:

Loan discharges for
closed schools, false certification, unpaid refunds, and death and
disability are considered taxable income.

And further down, they reference a letter from the Treasury and there's more specific statements.

Until I can find anything that says otherwise with a newer date than 2008, I'm going to consider the discharged amount to be taxable income.

Am I crazy to prefer us paying more in taxes to meeting with a tax consultant? I guess so.

[AFButch]

Just wondering, are you allowed to "off-set" any of this money through related student expenses?

[hedgey]

Well, finally got around to working on our taxes yesterday. That 1099-C "income" nearly gave DH a heart attack when he saw that it's going to make us owe the IRS over $8,000. Yep, I'll just get the checkbook out...

Needless to say, we got even less sleep than usual. My heart is still galloping over it. DH has taken lorazepam and stayed in bed, trying to sleep but actually staring at the ceiling.

I've been all over the Internet this morning trying to find anything that would support treating this loan forgiveness as a VA benefit. I have finally come across this, at the IRS website www.irs.gov/publications/p907/ar02.html It's Publication 907, dated 2012.

VA disability benefits. Do not include disability benefits you receive from the Department of Veterans Affairs (VA) in your gross income. If you are a military retiree and do not receive your disability benefits from the VA, see Publication 525 for more information. Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the VA. These include:

• Education, training, and subsistence allowances,

• Disability compensation and pension payments for disabilities paid either to veterans or their families,

• Grants for homes designed for wheelchair living,

• Grants for motor vehicles for veterans who lost their sight or the use of their limbs,

• Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death,

• Interest on insurance dividends left on deposit with the VA,

• Benefits under a dependent-care assistance program,

• The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001, or

• Payments made under the VA's compensated work therapy program.

I underlined the part that I think might be applicable. I'm going to contact a tax person (if I can find one who knows about VA situations) and I will come back with information when I get it.

Seaman, we can't get any credit or deductions for college expenses because our kid earned more than $3,800 in 2012 and even though lived with us for all 12 months, can't be counted as a dependent. (where in the USA could anyone live on $3,800 a year? just wondering!)

One thing I did see a lot of in my surfing on this question was a LOT of disabled vets being hit with unmanageable tax liabilities due to the discharge. Pretty much every online adviser said that it was sad but tough.

I know that we are very, very lucky to have been relieved of the burden of that loan. It's just terrifying to go from having to pay a few hundred dollars a month to owing the IRS $8000+ right now.

Poor DH is laying there wishing he'd never gone to the VA at all. Irrational, yes, I know. 'nuff said, right?

Anyway, I'm posting about this partly to vent and whine and let off some anxiety. But also partly to let other vets know about what to expect and maybe if I can find good news about this, to share that too.

[Chuck75]

This is going to be an interesting and possibly contentious issue.

The IRS sort of regards anything as taxable, unless it is specifically exempt.

The VA could care less, unless they have an excuse to extract funds from your tax payments, or the IRS is trying to attach part of compensation or pension payments.

The government bureaucracy has a thing about rules and regulations, in that something must be specifically allowed or it's not. When a lack of specific direction exists, bureaucrats often do nothing, or automatically act in a way that favors the government.

(That's a large oversimplification of a vary complex mind set.)

The only thing I can think of (and what I'd likely do) is to request a letter ruling from the IRS, stating clearly that the loan forgiveness is a benefit provided by/under Title 38, etc. and thus is not taxable. (If in fact that's where the authority to forgive the student loan resides.)

(This is my opinion, not tax or legal advice, since I'm a private citizen, not a lawyer or other qualified tax specialist.) For all I know, there may be case history on this one way or another.

A tax lawyer and/or accountant might be in your best interest. It's usually difficult to deal directly with the IRS when they think you might owe them money.

(And the VA for that matter!)

I have serious doubts that the average accountant or tax specialist has any familiarity with the VA's set of laws and regulations, other than a very basic knowledge that they are there.

Decades ago, before the 1980's tax reform, part of my salary and compensation was paid "in lieu" of actual expenses.

The language and so forth was set by a government contract. The IRS wanted all the 'gory" details. We ended up finding

another applicable law relating to the movement or location of certain government military assets. When this was cited on a return,

the IRS had to drop the requirement for details.

Edited June 3, 2014 by Chuck75

[Rover]

I enjoyed reading husband & wife teamwork effort .

[ping jockey]

Hello Hedgey,

I can apprecaite most folks look to IRS Publications for information and guidance; however, those Pubs are NOT Tax Law. They are the IRS's opinion on how the Tax Laws apply. In order of precedential legal treatment is: The Internal Revenue Code, The Treasury Regulations, and Case Law. The good news here is, Veterans Administration Compensation is "excluded" from gross income under I.R.C. Sec. 104(a)(4). And, considering it's the I.R.C. it's binding upon the IRS and the Courts. In other words if you meet the definition clearly, your position is rock solid.

The below is offered and should "ONLY" be viewed "in genearl", as many tax issues can be based upon individual facts and circumstances.

26 USC § 104 - Compensation for injuries or sickness:

http://www.law.cornell.edu/uscode/text/26/104

And here's an annotated copy of I.R.C. Sec. 104, as it applies to Veterans Disability Compensation:

Similaryly, Income from discharge of debt is gross income; UNLESS excluded by law under I.R.C. Sec. 108(a) - there's a list of exclusion here:

26 USC § 108 - Income from discharge of indebtedness

http://www.law.cornell.edu/uscode/text/26/108

My best,

Ping Jockey

Ps I'm completing my Masters in Taxation at Golden Gate University under Chapter 31 this year.

VETERANS' ADMIN COMP EXCLUDED FROM TAXTATION.pdf