The taxability of your student loans depends on the type of loan and the reasons for forgiveness. Here are some guidelines based on IRS regulations and Missouri state laws regarding your 1099-C from Discover Loans:
Receiving a 1099-C means that Discover Loans has reported the cancellation of your debt to the IRS. Generally, canceled debt is considered taxable income, and you must report it on your tax return. However, there are exceptions and exclusions that might apply to your situation:
- Event Code G: This indicates the debt was canceled due to a decision or defined policy to discontinue collection.
- Insolvency: If you were insolvent (your liabilities exceeded your assets) at the time the debt was canceled, you might not have to include the canceled debt in your taxable income
- Bankruptcy: If the debt was discharged in bankruptcy, it is generally not considered taxable income
- Assuming this might be a Private Student Loan: Here are tax implications for private student loan forgiveness:
- American Rescue Plan Act of 2021: Temporarily excludes forgiven student loan debt from federal taxable income through 2025 (IRS Pub 970)
- Exclusions: You may exclude the canceled amount if the loan is:
- For postsecondary educational expenses.
- A private education loan.
- From an educational organization or tax-exempt entity.
- Assuming this might be a Federal student Loan: Here is a brief summary of the situations where federal student loan forgiveness is typically tax-exempt:
- Qualifying Federal Loan Programs: Programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness offer tax-free forgiveness if you meet their specific requirements.
- Death or Permanent Disability: Forgiven debt is not considered taxable income if the borrower dies or becomes permanently disabled.
- Fraud or School Closure: Loans discharged due to fraud or school closure are tax-exempt.
- Legislative or Executive Actions: Debt canceled by an act of law or executive order is generally not taxable.
For more detailed information, you can refer to IRS Topic No. 431 and Publication 4681.
Missouri State Laws: Missouri doesn't generally tax student loan forgiveness.
Next Steps:
- Determine Insolvency: Calculate your assets and liabilities at the time the debt was canceled to see if you were insolvent.
- Determine if you meet the exclusions under federal or private student loan forgiveness (TurboTax will walk you through the questions)
- Enter Your 1099-C in TurboTax: Follow these steps:
- Sign in to TurboTax: Go to the TurboTax website and sign in with the User ID and password you used to file your tax return.
- Navigate to Your Tax Returns: Use the magnifying glass at the top right of the TurboTax screen and type "1099-C."
- Jump to 1099-C: Click the jump link to "1099-C."
- Enter 1099-C Information: Scroll down to "Less Common Income" and click "Start" on "Cancellation of debt (Form 1099-C)." Follow the onscreen instructions to enter your 1099-C details.
- When you enter your 1099-C in TurboTax, we'll ask a series of questions to determine if some or all of your 1099-C debt can be excluded.
- Important Note: If you get a 1099-C for debt that a creditor is still trying to collect, don't report it on your taxes. Uncollected debt isn't considered canceled, forgiven, or discharged, which means there's nothing to report, at least not yet.
If there are other clarifying details, reach back out.
[Edited 03/14/2025|7:10 am PST] @Klhogue
