I am receiving student loan assistance from state dental board. Under the new tax provision, payments made to the lender should be tax free. But the program says tax

[ilikeapplesandpies]

But the program says the payments will be considered personal income. This is obviously wrong given IRS publication 970. What happens when the program is not set up to comply with the tax code provision? How do I approach this so we do not pay unnecessary taxes?

[Rainman12]

Can be untaxed, depending on how payments are reported. If you get a 1099-C, it's taxable. How are your payments reported?

[ilikeapplesandpies]

I believe a 1099-misc will be issued. 

[Rainman12]

If you get a 1099 Form, then it's probably taxable. See PSLF link per reference for exceptions: "Generally, to qualify, your loan must have been made by the federal government, a state or local government; certain tax-exempt public benefit corporations; or an educational institution. These loans are generally those that require you to get a job or serve in an area with unmet needs. Specifically, loans which are forgiven through Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness Program (TLFP) are not taxable."

[Carl]

From what I see and read in this thread, others who have replied are not sure how to interpret your post. It's your terminology that's not clear. Two words basically - "LOAN ASSISTANCE".

If the money received is borrowed money that you are required to pay back, then you will not receive any type of tax reporting document requiring you to report it as any type of income. Borrowed money is not your money. It never was, is not now and never will be. It would also appear that the money does not come from a "qualified student loan". If that's the case, then any interest you pay on the loan is not deductible either. If you have a qualified student loan then the interest is deductible and the lender will send you a 1098-E for the first year when you start paying back the loan.

If this is not a loan that you are required to pay back, then it's a grant or scholarship. All grants/scholarships are reportable on your tax return as taxable income *INITIALLY*. the taxability of that money is offset by the "qualified" education expenses it is used to pay for. The only qualified education expenses for a scholarship are tuition, lab fees and books. That's it. There are no exceptions.

Now the same holds true for a grant. But with a grant, other things such as room and board can be deductible is unqualified but allowed expenses if *and only if* the grant specifically designates what the money can be spent on for education outside of the qualified expenses. But even then, it must be *in* *direct* *support* of the education.

For example, if the grant states that it can be used for housing, then you can use that money tax free to pay rent only for the period of time you are actually enrolled. So if you do not take any classes over the summer break, you can't use that money tax free to pay for housing during those months you are not enrolled in classes.

My overall impression is that you have a grant from the state dental board. That being the case, the money is fully reportable and fully taxable *INITIALLY*, with the taxability offset by the "qualified" education expenses it is used to pay for.

Please note the following:

- All scholarships, grants and 529 distributions are taxable income (initially) in the tax year they are recieved. It flat out does not matter what year that money may be designated *for*.

- All qualified education expenses are deductible in the tax year they are actually paid. It flat out does not matter what year you may pay *for*.

[ilikeapplesandpies]

Hi @Carl  and @Rainman12 , Thanks for replying. 

My program is sponsored by a government entity, for 3 years, to provide service in a area with healthcare shortage. It is not the NHSC or state NHSC (SLRP) or PSLR program. The award goes directly to my lender, I will not get any money directly. 

It is for money I need to pay back, but the government agency states that it "may be considered personal income" in the contract. 

It is the exact same program described by the IRS Memorandum. Link Here: https://www.irs.gov/pub/irs-wd/1147001.pdf  but, a different states and in the year 2019. 

Also, this program that I am in, started in 2005, before the tax provision (see below) was implemented in 2008. The program has never revised their policy to be compliant with the tax provision, due to few people applying to it. 

Shttps://www.irs.gov/publications/p970#en_US_2018_publink[phone number removed]tudent loan repayments made to you are tax free if you received them for any of the following.

• The National Health Service Corps (NHSC) Loan Repayment Program (NHSC Loan Repayment Program).
• A state education loan repayment program eligible for funds under the Public Health Service Act.
• Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).

My question is, how do I report it and how do I excluded my "wages/personal income"? Also, who would be able to tell me definitely if what I am doing is correct or not? 

Thanks!

[Carl]

As I see it, that IRS issued memorandum is dated 2011 - 8 years ago.  Basically, you can completely disregard it now. For example, take a look at the referenced Internal Revenue Code section 108 at https://www.law.cornell.edu/uscode/text/26/108.  It deals with "discharged debt". That basically means it applies to someone who has filed for bankruptcy or some other form of debt reduction because of financial hardship. It also addresses loan forgiveness if certain conditions are met such as doing volunteer work for a defined period of time with  your skills for the Peace Corps. Now that's just one example here. I haven't bothered to look for other examples, as that was the first one to "jump out at me" and from my perspective I see no need to go any further.

Now when I look at 108(f) as a whole, the 108(f) (1) is referencing student loans which I would assume are qualified student loans. It basically talks about loan forgiveness referred to as "discharge of debt" if the borrower meets certain criteria. Now it looks like your "lender" qualifies your loan as a "qualified" student loan under section 108(f)(2)(C) or 108(f)(2)(D)

Now in most cases when a loan is forgiven and the borrower is not required to pay it back, it's common for that borrowed amount to no longer be considered borrowed. Instead, it's considered as "given" to the borrower. That means the lender to deduct that given amount from their taxable income, and the borrower has to include it in their own taxable income and pay taxes on it.

But sometimes for students there are programs where if the student meets certain per-defined conditions, not only does the student not have to repay the loan, the student also does not have to include the borrowed money as taxable income. Instead, the money is "treated like" a grant.

So at this point based on the limited "finder details" of information you've provided, and the vast amount of assumptions based on  no "real" facts, it's a toss-up as to how you will be able to treat this at tax filing time. I would highly suggest you take all the documentation you have on your particular situation and visit a tax professional.

Now understand I"m not recommending a CPA here. While you may find a CPA that is knowledgeable in the "finer details" of your specific situation, I myself would feel more comfortable with a tax professional. While a tax attorney would be best, I think that would be a bit of overkill for what an attorney would charge, as opposed to a tax professional.

Now if you're in a college town I would expect at least a few CPAs to be knowledgeable enough in this area to keep you out of potential trouble with the IRS in the future on this specific matter.