1099-C from Discover Student Loans

[N_Br0wn]

Hi, everyone. 

I received a 1099-C from Discover Student Loans. I panicked at first, and tried to figure out how I can claim insolvency since I certainly wouldn't be able to pay the taxes on the 1099-C. After much research, I noticed that Discover Student Loans closed their student loans department and cancelled most of their student loans.

I was already in default with the loan. The 1099-C I received has Code G on it (Code G is: cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt). I also read that under the American Rescue Plan, student loans cancelled between January 2021 and December 31, 2025 are exempt from federal income taxes (unsure of state taxes, so still researching; I'm in NY).

My questions are:

• What do I do with this? Do I file this?
• Do I still have to prove insolvency? What do I submit to prove insolvency?
• Can I still file online? 

[Vanessa A]

The American Rescue Plan does not apply to student loans that were discharged due to being in default.  The loans that is does apply to, according to the IRS, the borrowers will not received a 1099-C if it is not a taxable event.  

1) Yes, You will need to include this on your tax return unless you qualify as being insolvent as this does not fall under the American Rescue Plan Act.

• 
  If you had a student loan that was discharged after December 31, 2020, and the amount of the dischar...

2) You would fill out this insolvency worksheet to determine if you are insolvent.  If you are claiming insolvency, this is not a situation that TurboTax handles, so it is recommended that you contact a professional. 

• To qualify, you must demonstrate that your total debt exceeded the fair market value of all of your ...

3) No, you would not be able to file online (at least through TurboTax) if you are claiming insolvency as you would need to attach unsupported forms to your return. 

• "How to report the insolvency exclusion.  To show that you are excluding canceled debt from income under the insolvency exclusion, attach Form 982 to your federal income tax return and check the box on line 1b. On line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellation. You can use the Insolvency Worksheet to help calculate the extent that you were insolvent immediately before the cancellation. You must also reduce your tax attributes in Part II of Form 982, as explained under Reduction of Tax Attributes, later".  Pub 4681
  
  
   

[LindseyS]

Hi Vanessa,

Where does it state that any private loans that were previously defaulted but discharged (due to student loan company going out of business) - do  not qualify for tax exemption? I am reading that all private student loans regardless of reason for discharge qualify.

Thank you,

Lindsey 

[HowardSinger]

Yeah I don’t think Vanessa knows what they’re talking about because there is literally nothing in the legislation that excludes discharged defaulted loans from tax exemption. It says ALL student loans are exempt. 

[HowardSinger]

You are wrong. Nowhere in ARPA does it say loans discharged due to default are excluded from tax exemption. It says ALL loans. 

https://www.congress.gov/117/bills/hr1319/BILLS-117hr1319enr.pdf

please read section 9675 and educate yourself before spreading incorrect information.

[N_Br0wn]

The information you’ve suggested is wrong. Now, if I choose to use TurboTax for my filing (which I’ve done in the past), your software is not up to date with current laws and will make me pay for the student loan which is considered non-taxable by both federal and state government for me, according to the ARPA. So how do I get around that? 

[CatinaT1]

It seems from this Discover article, the loan was cancelled not forgiven, and should be included as ordinary income.

Additionally, since it shows a code G, is it not qualified student loan forgiveness.

Publication 4681 (2024), Canceled Debts, Foreclosures, ...

[N_Br0wn]

It seems like Brittany here has a completely opposite response in which it is NOT considered taxable income. The tax experts need to get together and figure out what the truth is. 

https://ttlc.intuit.com/community/college-education/discussion/private-student-loans-forgiven-receiv...

[HowardSinger]

This is wrong. Discover issued letters stating that it would be reported to the IRS and credit bureaus as paid in full. The issue is that student loan servicers were instructed not to provide 1099s as it would confuse borrowers about whether to report it or not. It does not matter if it was canceled or forgiven. If it was a student loan discharged between 2021 and 2025, it does not count as taxable income according to ARPA. There is no difference between “forgiveness”, “cancellation” or “discharge”. It is purely semantics. Nowhere in ARPA does it specify that the loan must be listed solely as “forgiven” for it not to count as income. I even spoke with someone in the same situation who filed and said it ended up not counting as income. I honestly have decided just to file with CPA assistance because it is very clear that Turbo Tax has not adjusted their filing system to reflect current legislation. This is not shocking to me seeing as TT is known for lobbying against free IRS filing services to squeeze more money out of its customers. At this point, if you can afford CPA assistance, just go that route to be on the safe side.

Edit: The only way it would be considered taxable income is if your state decides not to reciprocate ARPA’s federal legislation and taxes it as income. I believe only 6 states have chosen to count it as taxable income. So look into if your state is one of the 6 that tax student loan discharge. 

[LindseyS]

I can confirm that H&R Block’s online form does allow you to enter in your discharged student loan under income, and it automatically flags it as $0 (because it does not count towards taxable income). So we are at least reporting the student loan discharge took place which is a good thing, but no amount changes on your income which is what we would expect! 

[CatinaT1]

Brittany and I may be saying the same thing and situations can be different. 

According to this IRS publication, Code G means:

 Code G—Decision or policy to discontinue collection. Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice.

This typically would not be part of the American Rescue Plan. 

For your specific situation, I think you need to contact Discover to confirm one way or another what the terms of the cancellation were. You need to know if the cancelation was part of the American Rescue Plan or a type of discharge that would require it to be reported as taxable income. 

@N_Br0wn 

[N_Br0wn]

@LindseyS 

They were quite unhelpful and simply said that they sent out 1099-Cs as the department of student loans has been closed. My account is closed. It is marked as paid in full on my credit reports. 

this shouldn’t be as difficult as it is. 

[N_Br0wn]

So I’m thinking I should use HR Block for this filing to make sure that it’s not included as income. Would I be able to use the free filing service from them for this specific 1099-C issue?

[HowardSinger]

Where does it say that that reason is excluded from ARPA? It’s just giving a reason why the debt was cancelled but does not say it excludes that debt from ARPA.

[DianeW777]

It depends. If you are saying you received a 1099-C from student loan delinquent debt, and it was cancelled, see the information below. It must be included in your income. 

Rules changed with the American Rescue Plan Act (ARPA) of 2021.

Student loan forgiveness. The American Rescue Plan Act (ARPA) of 2021 modified the treatment of student loan forgiveness for discharges in 2021 through 2025.

Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude this amount from gross income if the loan was one of the following. 

• • A loan for postsecondary educational expenses. 
• • A private education loan. 
• • A loan from an educational organization described in section 170(b)(1)(A)(ii). 
• • A loan from an organization exempt from tax under section 501(a) to refinance a student loan.
  • For more information for your specific situation see IRS Publication 970 (starting on page 37)

If you decide you must include the income use the instructions in the link below:

• How do I report a 1099-C?

@HowardSinger