Living in CA, wanted to know if we do/don't need to include our form 1099 income since we meet the requirements of 26 USC 108(f)(4), as far as I can tell?

Did you receive a 1099-C? Are you a part of national health service corps loan repayment program? If your student loans are canceled because of your employment with the federal government, none of this canceled debt is taxable. And if the debt you fail to pay would be deductible had you paid it, the cancellation is not taxable either.

Thank you for responding TurboTaxMichaelIDC.  It was a 1099 MISC, but we found a letter sent in to my wife's email saying, "In the case of an individual, gross income shall not include any amount received under...or under any other State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas (as determined by such State)."  She was awarded (part) loan payoff as part of a Health Professions Education Foundation program and our community has a shortage but of course they mention that they aren't tax experts in the same breath.  Again, thank you very much for fact checking this.

We're both citing similar references. You would know that your situation qualifies. It seems that we could have had an easier time of it had if been a direct cancellation of debt with an exception (certain student loans). I have no idea how much the 1099 is for, but the fact it's reported, means the IRS is expecting it on the return. If the email came from the payer of the 1099, you could enter the income and deduct it out again citing the sec 108 reference. It may be best to clarify with them before you do. The answer below shows you how.

from TurboTaxToddL

Was this payment subject to the SEC. 10908 EXCLUSION FOR ASSISTANCE PROVIDED TO PARTICIPANTS IN STATE STUDENT LOAN REPAYMENT PROGRAMS FOR CERTAIN HEALTH PROFESSIONAL?

If so, here are the steps necessary to report the 1099-MISC and the amount to be excluded from your income.

(Since the IRS got a copy of the 1099-MISC, you have to report it on your return).

To report the income:

• Enter the 1099-Misc in the "Other Common Income" section (enter "1099misc" in the Search Box and Select "Jump to 1099misc")
• Enter "SEC. 10908. Student Loan Repayment" as the description. Indicate that it does not involve work like your main job, that it did not involve an intent to make money, and is not a payment you received in the past or expect in the future.. 
• The income will be reported on line 21 of your return.

To report the exclusion:

• Go to Less Common Income, Miscellaneous Income and Other reportable income (enter "other reportable income" in the Search Box and Select "Jump to other reportable income")
• Continue to the screen Other Taxable Income. Enter the description as "SEC. 10908 Exclusion" and the amount as a negative number.

A corresponding negative amount will be entered, and line 21 will be zero. (See the attached screenshot below. Click to enlarge.) (different descriptions, but still offsetting).

Awesome!  Thank you TurboTaxMichaelIDC and TurboTaxToddL.  I will work it on Turbo Tax shortly.

TurboTaxMichaelIDC, I performed the above operations and once I reached the Federal Review portion, 1 item came up for REVIEW.  It wants me to CHECK THIS ENTRY, 'Wages, Salaries, & Tips Worksheet: Line 9 amount for the spouse-1 shouldn't be less than zero.'  The amount in there is the negative number that I used for the exclusion including the correct description.  The math adds up, should I just continue on?

It shouldn't have made it to that worksheet as "earned" income. Can you go through the instructions again and make sure that no answer alludes to it being part of your job or earned? Thanks.

TurboTaxMichaelIDC, thank you, it passed the federal validation.  There is a section right after jumping to other reportable income that was similar and that is where I first entered my data.  I deleted that info and CONTINUED all the way until the Other Misc Taxable income section which was towards the end.  Take care.