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$6000 taxes for 2012 due to student loan cancellation due to disability claiming insolvent what is that and how?

Bemidji, MN |

Disabled since May 2010 social security . Student loan cancelled April 2012 . Combined state and federal tax $ 6000 . 00 To file insolvent on this debt must be over asset amount do you claim partial removal of loan or is it the difference between debt and asset is all you can write off . Low income due to disability extremely difficult to pay taxes when living expenses take 98% of income . Low income poor credit score cannot qualify for home equity loan .

Attorney Answers 3


  1. Your question is a little ambiguous; however, it's clear that you have cancellation of debt income and it sounds as if you'd like to try and qualify for the insolvency exception for that income. If so, I would strongly recommend that you consult with a competent local tax return preparer who is familiar with the insolvency exception. You could also consult with the Voluntary Income Tax Assistance program run by the Bemidji State University. The information page on the university's website is here: http://www.bemidjistate.edu/academics/departments/accounting/professional_development/vita/

    Good luck.

    My answer does not constitute legal advice and may not be relied upon by anyone for any purpose and does not constitute an attorney/client relationship or an offer to form such a relationship. This disclaimer is intended to be fully compliant with the requirements of Treasury Department Circular 230 and the terms thereof are fully incorporated by reference. If you wish to consult with me please contact me at dana@nytaxcounsel or visit my website at www.nytaxcounsel.com


  2. You cannot wipe out taxes during a bankruptcy UNTIL they are at least 3 years old.

    Be sure to designate "best answer." If you live in Oregon, you may call me for more detailed advice, 503-650-9662. Please be aware that each answer on this website is based upon the facts, or lack thereof, provided in the question. To be sure you get complete and comprehensive answers, based upon the totality of your situation, contact a local attorney who specializes in the area of law that involves your legal problem. Diane L. Gruber has been practicing law in Oregon for 26 years, specializing in family law, bankruptcy, estate planning and probate. Note: Diane L. Gruber does not represent you until a written fee agreement has been signed by you and Diane L. Gruber, and the fee listed in the agreement has been paid.


  3. I couldn't really have said it better myself, Mr. Atchley. See 26 USC § 108 (http://www.law.cornell.edu/uscode/text/26/108). See specifically § 108(a)(1)(B) relating to insolvency; § 108(a)(3) (limiting exclusion to the amount by which the taxpayer is insolvent); and § 108(d)(3) (defining "insolvent"):

    "For purposes of this section, the term 'insolvent' means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge."

    So if your net worth was negative *before* your student loans were forgiven by an amount greater than the student loans, you can exclude the entire cancellation of debt income and wipe out your tax bill. You demonstrate this by filing Form 982 with the Service.

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