When filing for total permanent disability for discharge of federal student loans what is the tax rate I will have to pay on $25,000

[bradley-marema]

I've unfortunately reached a point with my disability that I am unable to work enough to pay for my student loans I have filed for total permanent disability. I found out when researching this that once the loan is forgiven the IRS considers all of it taxable income. Both subsidized and unsubsidized loans total around $25000.00. Could you counsel me on how much that will end up costing me in taxes and how I go about setting up some kind of payment plan for it. THank You,
[name removed]

[Opus 17]

It depends on your total income for the year that the forgiveness is processed and the 1099-C is issued, as well as any deductions, spouse income, etc.  This article has a good view of the tax brackets. http://www.forbes.com/sites/kellyphillipserb/2015/10/21/irs-announces-2016-tax-rates-standard-deduct...

It is likely to be taxed at 15% or 25% or a blended rate, depending on your other income.

When you file your tax return, pay as much as you can, and you can use Turbotax to request a payment plan for the rest.  

You may be able to exclude the cancelled debt from your income if you are going through bankruptcy or are insolvent (owe more debts than you can pay back).  If you feel that is the case, you can attempt to include a form 982 with your tax return to show you are insolvent and don't owe the tax.  (But if you are canceling the loans in order to prevent yourself from becoming insolvent or bankrupt in the future, then unfortunately it will be taxable.)  Form 982 is not supported in Turbotax online, you would need to use the desktop version.

[bradley-marema]

Thank you very much for your help. I was just doing a little calculating and it looks as if I will end up in the 25 percentile bracket. I estimate my taxes to be around $5471.00. I have no idea how I'm going to pay this I hope there is something that can be done to help my situation. What desktop version of   Turbotax should I purchase for this type of situation? Thanks again.

[Opus 17]

Deluxe is fine.

[TaxGuyBill]

If you are not able to pay all of your taxes, you can set up an installment agreement to make payments to the IRS.  It is also possible that you could qualify for an Offer in Compromise, but that could be a bit more tricky, depending on your circumstances.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/individuals/payment-plans-installment-agreements">https://www.irs.gov/individual...>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/individuals/offer-in-compromise-1">https://www.irs.gov/individuals/offer-in-comp...>

As Opus said, are you "insolvent"?  If so, you may be able to reduce or eliminate the taxes on the forgiven debt.   Fill out the worksheet on page 8 of this link to determine if you are "insolvent" or not:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p4681.pdf#page=8">https://www.irs.gov/pub/irs-pdf/p4681.pdf#page=8</...>

[bradley-marema]

I'm not completely insolvent at this time however my condition will only get worse and there is no treatment options available to me at this time. I am only able to work approximately 20hrs per week at this time. and if I am able to keep working that many hours I will. But I guess you could say I am insolvent when it comes to a debt like my student loans. If I were to make those payments I wouldn't be left with enough money to eat. Thank you.

[bradley-marema]

Well according to this worksheet I am $21,123.00 insolvent.

[TaxGuyBill]

If that is the case, that amount will not be taxed.  You would only owe tax on the other $3900-ish of the forgiven debt.

[Opus 17]

Of course, it will depend on your financial condition as of the date of the actual forgiveness, which might be better or worse.  But definitely keep it in mind, and keep pursuing the forgiveness.  Obviously, even paying $6000 of tax is better in the long run than paying $40,000 of loans with interest.

Also, just a note about disability: if you can work 20 hours a week, you are not disabled for IRS purposes.  For the IRS, disabled means unable to perform any gainful work.  You may of course be disabled for forgiveness purposes, which is a separate set of rules.

[SweetieJean]

Keep state taxes in mind.

[bradley-marema]

Opus 17 look up substantial gainful employment. In order to qualify for Social Security Disability you cannot have substantial gainful employment which means you cannot exceed $1130/month gross. Anything under that is not considered substantial gainful employment. Which is going to be a moot point anyway because with the rate my health is deteriorating I won't be able to work part time anymore. So the deluxe version is what has the proper forms and is the right product for my situation? THanks..

[bradley-marema]

I just re-read your last response you said for IRS purposes. Yes you are right about that I have to file a tax return for that work. I only ended up making 11k last year. But in 2013 and 2014 I was doing great I'd just gotten out of school and was loving my job working 60hrs/week and then my health crashed again. It really sucks I worked so hard for that degree and was at the top of my class and those two first years in the business were stellar.

[SweetieJean]

The IRS definition and the SSA definitions are completely separate.  However, I hope you have applied for SSDI and any employer or private disability plans that you have.

[Opus 17]

Disabled for tax purposes is different than disabled for SSD purposes. There's no black-line dollar amount with the IRS.  See this <a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p524/ar02.html">https://www.irs.gov/publications/p524/ar02.html</a>

Being disabled for IRS purposes only has a few relatively minor benefits.  There is a small tax credit, and it affects your ability to claim the child and dependent care credit if you pay daycare expenses for your children under age 13.

You are disabled for IRS purposes if you are under retirement age and receiving TAXABLE disability pay.  If you are not receiving taxable disability pay, then the IRS uses the substantial gainful employment test:
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•Permanent and total disability.    You are permanently and totally disabled if you can't engage in any substantial gainful activity because of your physical or mental condition. A qualified physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death. See Physician's statement , later.

•Substantial gainful activity.   Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit. Full-time work (or part-time work done at your employer's convenience) in a competitive work situation for at least the minimum wage conclusively shows that you are able to engage in substantial gainful activity.
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Also note that, because the IRS follows its own rules, it is possible to be disabled for IRS purposes even if the social security administration has not approved you, and it is also possible to be disabled under the rules of the SSA or a private disability insurance policy and not be disabled on your 1040 tax return.

I don't mean to nitpick or disparage your condition.  But the rules of the SSA are different from the rules of the IRS.

[SweetieJean]

Alos, we need to ask if anyone co-signed for your student loans?