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I went to college, graduated and had a bunch of student loans.

I got them waived, on account of being permanently disabled. Now the loan organization is going to report this as income to the IRS. I'm going to have to pay taxes on that.

The loan organization told me there might be a way to file it in such a way that I won't have to pay taxes on it. Does anyone know how to do this or have experience with this?

  • The only exception that applies to you is if (and to the extent) you were insolvent -- or if you actually went bankrupt, but I assume you would have mentioned that tiny detail. See Topic 431 - Canceled Debt – Is It Taxable or Not? and in more detail Pub 4681 (PDF). – dave_thompson_085 Feb 23 '17 at 3:23
  • Do I fill out the forms before I see my tax guy or do I fill them out at the time I see him? – Michael Feb 23 '17 at 5:31
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    I'd say that it is important to find a good accountant this year. Not H&R Block, but someone really good. – Pete B. Feb 23 '17 at 13:00
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I came here in 2019, so others might, too. As of this date: IRS Tax Topics 431 includes

  1. Amounts from student loans discharged on the account of death or total and permanent disability of the student.

as one of the

EXCEPTIONS to Cancellation of Debt Income

meaning this is not considered income provided the loan was:

made by a qualified lender to assist you in attending an eligible educational institution. 2018 Publication 4681

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Claiming insolvency (bankruptcy) is the only present way to avoid the taxes on the forgiveness of the loans. There is a bill that hasn't been passed yet which would eliminate taxes on the forgiven amount if your account was in good standing and for a long term.

But a bankruptcy is going to hurt you much more than paying the taxes and keeping your credit intact. The IRS will work out a payment plan with you on the taxes; probably better to consider that.

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    Student loans are non-dischargeable in bankruptcy unless the debtor can prove an undue hardship. In this case the person may have been able to have the student loan(s) discharged due to the disability. But, the loan has already been forgiven so now you're talking about a tax liability, which is also non-dischargeable in bankruptcy. Separately, people filing bankruptcy already have ruined credit. – quid Mar 8 '17 at 18:55

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