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Canceled Student Loan Articles Misguided

January 11, 2013

I picked on some news outlets a few weeks ago due to their shoddy reporting on the tax consequences of cancellation of debt from the foreclosure of a principal residence. Just a few days later, I came across some articles that misapplied the potential consequences of cancellation of debt from the forgiveness of student loans. This time, the two biggest offenders are the New York Times (again) and the American Bar Association Journal. You can link to these articles here – NYTimes and here –ABAJournal. I even decided to comment on the ABA article (scroll down to comment 12). Once again, these articles all fail to mention any of the exclusions available to taxpayers with canceled debts. A taxpayer that receives Form 1099-C should review the exclusions available to them as discussed in IRS Publication 4681. The insolvency exclusion is the most notable because it has been around for some time and is not set to expire at year’s end. The insolvency exclusion uses a worksheet to break down the taxpayer’s assets and liabilities. Once tallied, the taxpayer is only required to include in income the amount of canceled debt to the extent that he or she is solvent. In fact, student loans forgiven pursuant to certain work programs (usually public service of some sort) are given explicit rights of exclusion from taxable income. See Section 108(f)(1). As I have mentioned before, these factual errors could easily have been prevented if the authors took the time to properly research the issue. I have said it before and I’ll say it again – if you decide to jump into the tax code pool to make a point, be sure to wear your floaties. Until next time, Alex
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