Will getting college loans forgiven potentially cause loss of TDIU?

[kent101]

If a Veterans gets TDIU that 100% rating makes the Veteran eligible for college loan forgiveness. When a college loan is forgiven it counts as income and must be filed on a tax return. Since a Veteran isn't allowed to make above poverty level could college loan forgiveness cause the VA to misinterpret the income reporting requirement as possible work and propose reduction in TDIU? Say the Veteran was forgiven $30,000 and reported it to the IRS. Now the IRS has on file that the Veteran made $30,000 that year. When the VA checks Social Security records and sees the Veteran reported $30,000 in income while on TDIU couldn't they interpret that as the Veteran having worked? Anyone ever hear of any problems with this?

[Gastone]

I don't believe any loan forgiveness would be considered "Earned Income" for IU purposes. Therefore, when an IU Vet completes the VA Mandatory 21-2140 IU Aniversary Date Filing regarding "Earned Income" and Employment (during past 12 months), he would not consider nor report the Loan Forgiveness Amount. I know I wouldn't include it.

Any time you're worried about a particular Fed Tax Question, give thought to contacting a Tax Professional or just call the IRS to discuss your concerns. Verify that the term "Earned Income" is strictly related to employment earnings. Your potential Loan forgiveness could still lead to a Fed & State Tax Liability.

Semper Fi

[broncovet]

I agree with Gastone.  The IRS has complex rules.  We have to pay taxes on most income, and some of that is not "earned income".  For example, we can earn money with "investment income".  

Having to pay taxes on the gains from the forgiveness of student loans is not "income" from the standpoint of the criteria of "Substantial Gainful Employment" (SGE), but it is "income" that is taxable for IRS purposes.  

In a similar way, payments you get from VA for compensation is not "earned income", and is not taxable.  The fact we dont have to pay taxes on VA comp actually means that it increases our income, to the extent we dont pay taxes.  

If I earned 3000 per month in a job, I would have to pay taxes and get to keep less than 3000 per month.  However, if I get 3000 per month in VA comp, my tax liability on that is zero.  However, if I did make money from an investment source...even from a savings account (yea, I know those dont pay much, if any anymore), then I would have to pay taxes on the monies from investemts.  

A good example of this is an IRA.  Lets say you did as financial planners suggest, and set up an IRA while you were working.  

IRS rules are that you CAN take money out of your IRA by your age 59 1/2, but you MUST start taking money out of your IRA by age 70.  

So, any money you withdraw from your IRA is taxable, but you dont have the tax penalty if you follow IRS rules, some of which are above.  

If you withdraw 1000 per month from your IRA, then you would have "taxable income" of 12,000 per year, plus any other investments or income that would be taxable.  However, VA is not going to say,

"Ahhhhh taxable income..he must be working and collecting TDIU".  No.  They know the differnce between "substantial gainful employment" and drawing money out of your IRA, or having to pay taxes on your

student loan forgiveness.