Today TaxMama hears from James in the TaxQuips Forum with a disturbing problem. His fiancée got a bill from IRS for a student loan that was cancelled because she had excellent grades. Why is that taxable?
Dear James,
Sheesh. You would think that doing things right should not come with penalties. Unfortunately, when it comes to taxes, sometimes our legislators do dumb things. They did not place exclusions in the law for doing well. So…
When a debt is cancelled, taxable income is generated. Period.
However, when a student loan is cancelled, the only way for it not be taxed as income is to have it cancelled under specific programs where the student provides service in specific areas, like teachers, nurses, doctors, etc. working in low-income areas, etc. (Remember Dr. Joel Fleischman in Northern Exposure, in Alaska?)
So, you can help your fiancee by doing some research. Does her, specific loan, qualify for the special exclusion from taxes?
I doubt it, since the cancellation was not due to providing services. But it doesn’t hurt to do the research in case I’m wrong!
And remember, you can find answers to all kinds of questions about student loans and other tax issues, free. Where? Where else? At www.TaxMama.com.
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