TPD Discharge/1099-C

[SeekingPeace]

I am anticipating my TPD discharge for $100K & some change student loan debt spring 2016. I asked the person at the TPD dept if I am going to have to pay taxes on it and she said no.

 

Now as I start to see a light at the end of this very dark tunnel ... I am finding I should expect to get a 1099-C for it after all. This won't be an issue until I file my 2016 taxes in '17 but if I file married it will put our income well into the astronomical tax bracket.

 

Obviously I have no income but my spouse is over 6 figures. We're paying expenses for 2 separate households in two states, lots of travel between. (Home is Alaska where he works but I have to be in Lower 48 for medical care.) Our credit is crap due to my insane medical and we're over extended.

 

Now that I'm stable and no longer terminal ... When you're facing death nothing as trivial as credit really matters... I've enrolled in the Dave Ramsey course to start to get our finances on track and fix everything.

 

Should I start planning now to pay that $30K+ tax bill? That is gonna hurt! We have a balloon on our mortgage in 4 years and will need to refinance but have about $30K in bad debt we probably have to pay to clear (judgements) before getting a re-fi.

 

Help!

[hodap2001]

Here is the answer from the TPD website regarding the 1099. http://www.disabilitydischarge.com/faqs/

 

Are there any tax implications after approval and discharge of my federal student loans?

The Department reports the discharge of any loan debt totaling $600.00 or more to the Internal Revenue Service (IRS) for the year that the loan was discharged. If your loans are discharged, we will send you an IRS Form 1099-C that will identify the total amount of your discharged debt. The amount of the discharged debt will be considered income for federal tax purposes and possibly for state tax purposes. You may want to consult with a tax professional to determine how this may affect your personal taxes.

My recommendation is to start preparing for this large tax liability NOW and if you are not ready, sign up with the IRS for a payment plan as soon as you file in 2017.

hodap2001

Edited June 15, 2015 by hodap2001

[SeekingPeace]

I knew they were going to 1099 me I have found more information regarding this. There is an IRS form 982 and you can absolve all or part of the amount being credited as income by filing insolvency.

 

From what I understand it is basically an asset/debt calculation but you take your financial picture from right *before* the discharge so the student loan itself is counted as a debt. Even if you have some assets you can still write off part of the discharged amount.

 

i.e. You get a 1099 for a discharged student loan in the amount of $100,000:

 

Assets (savings, home equity, guns, etc.) = $ 54,000

Debts (discharged loan, credit cards, etc.) = 114,000

Level of Insolvency = 60,000

 

That $100,000 loan that you got the 1099 for now you are only responsible for $40,000 of it. Or, as in our case, we're probably going to still be upside down so we'll get to write all of it off. I hope anyone that comes along that is also getting a TPD discharge sees this post (if they didn't already know) so they don't go broke trying to pay the taxes on a loan that is written off because you can't work anymore! It just makes no sense to do that to folks.

[hodap2001]

Make sure you still see and talk to a tax professional. This is good guidance above, but as always talk to the tax pros!

[SeekingPeace]

Make sure you still see and talk to a tax professional. This is good guidance above, but as always talk to the tax pros!

 

Absolutely! That IRS form 982 is crazy confusing!!! The one site even suggested if your tax preparer says they're not familiar with it but they can look it up... they say to find someone else!

 

I figure I have lots of time to find someone that knows this stuff and most importantly; I now know to get a snapshot of our financial situation *at the time* the loan finally discharges rather than trying to piece together what debt we did or didn't have at that moment.

[smithma]

I just logged into Nelnet's website to see my Student Loans have been Permanently Discharged. I know I will receive the 1099C for this tax year but not sure what the next step is other than finding a new tax preparer as my last year tax preparer made all kind of errors. I was discharged due to VA Disability. Any insight into what my next steps should be will be helpful. My loans were consolidated into 2 loans and both were in Good Standing. How will the discharge be reported on my Credit Reports? Ready to make sure everything is reported properly!!!

 

Total amount discharged was $72,000K!!!!!

[hodap2001]

The Disability Discharged student loans will be removed from your credit profile as if you never had any student loans to begin with, so you should expect a clean slate; however, be prepared to take your Disability Discharge notice letter and forward it to the servicers in case they "forgot" to remove the credit remarks.

 

Let us know how you did on taxes for 2016 - I'd be curious to find out the outcome.

 

Congratulations on your Disability Discharge of student loan debt.