Texas residents and Americans across the country are always looking for financial breaks. However, what if a financial break meant thousands of dollars in tax liability? This is exactly what happened to one woman who is now struggling to pay off her tax obligations, which resulted from a release of student debt.
This story began when $91,000 of a woman’s student loan balance was discharged due to her total disability. However, while this financial release seemed like a dream come true, the story quickly evolved into a tax nightmare.
The woman was diagnosed with a tumor that resulted in the removal of a majority of her small intestine. This created a number of other health problems. Ultimately, her physical condition was so severe that the woman retired from her job on a disability pension in 2010. Due to her disability, her federal student loans were released.
Unfortunately, this discharge of debt would be reported to the IRS as Cancellation of Debt Income (CODI). Cancelled debt often equates to taxable income. Lenders must report discharged debts of $600 or more to the IRS on a 1099-C form.
However, cancelled student loan debt is not always taxable. For example, if the woman’s debt had been cancelled because she worked in a specific profession-medical, teaching or law enforcement-she would be eligible for a total elimination of the debt. Nevertheless, there are no tax breaks for cancellation of debt related to a disability. Student loans cancelled due to the Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965) are taxable. Now, she owes the IRS $26,000.
The woman tried calling the IRS for assistance. However, at this point, the woman has been warned that if she cannot pay the taxable income, the IRS will put a tax lien on her house and report her to credit agencies.
Unfortunately, there are so many individuals with disabilities that are struggling through this exact dilemma. If you are dealing with a similar problem, you may consider speaking with a knowledgeable tax law attorney. He or she might help you evaluate your financial options.
Source: Yahoo! News, “New Jersey woman’s student loan debt creates tax nightmare,” Gerri Detweiler, April 6, 2012