Public Service Loan Forgiveness (PSLF) - Taxable?!

Technical topics regarding tax preparation.
#1
AlexCPA  
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After hours of researching the income tax implications of Public Service Loan Forgiveness (PSLF), I'm still seeing contradictory information regarding the income tax treatment of the debt cancellation.

Starting with a non-authoritative source, I first read the FedLoan Servicing website which states the following:

Are loan amounts forgiven under PSLF considered taxable by the IRS?

No. According to the Internal Revenue Service (IRS), student loan amounts forgiven under PSLF are not considered income for tax purposes. For more information, check with the IRS or a tax advisor.


That seemed simple enough. Now onto the authoritative sources, starting with IRC §108(f)(1) which states the following:

(f) Student loans

(1) In general

In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.


Well, what are these "certain professions"? One answers seems to have been provided in a Tax Court Summary Opinion which deals with IRC §108 (Moloney, T.C. Summ. 2006-53) which states:

The term “certain professions” to which sec. 108(f)(1) applies are medicine, nursing, and teaching. Porten v. Commissioner, T.C. Memo. 1993-73 n.1 (citing Staff of Joint Comm. on Taxation, General Explanation of the Revenue Provisions of The Deficit Reduction Act of 1984 at 1999(J. Comm. Print 1984)).


Accordingly, is the ability to exclude the debt forgiveness from income solely limited to taxpayers working in the fields of medicine, nursing, and teaching, or am I missing some authoritative guidance which expands the scope of IRC §108(f)(1) beyond these three professions?

Any help is greatly appreciated!
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#2
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I left the financial aid world for public accounting right when PSLF became a big talking point. If FedLoan Servicing approved an application for PSLF I would always argue it is non taxable. FedLoan Servicing is the only processor for these claims no matter who holds the student loan and the requirements to determine this process is very detailed and a big burden for anyone applying. There are other types of loan forgiveness under different programs that would be taxable to the recipient. I don't have the time today to give any citations so I am talking from experience from the industry. As far as I know the laws are still in place as I worked with them and the answer could change with a new bill from Congress...
 

#3
AlexCPA  
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Thank you for your response. After researching this topic thoroughly, my assessment is that the issue of exactly what is or isn't taxable with regard to Public Service Loan Forgiveness is vague at best and will need to be reconciled either through further guidance or through the courts. Accordingly, I'm frankly shocked to see that the Fed Loan Servicing website would include seemingly unfounded blanket statements regarding the treatment of loans discharged through PSLF for income tax purposes.
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#4
Noobie  
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Most taxable and nontaxable cancellation of debt is reported on a 1099-C.
Perhaps get a transcript to see if one was issued?
 

#5
AlexCPA  
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Thank you, Noobie. In this particular situation, however, the question pertains to a client who may be eligible for PSLF years from now.
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#6
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General Information
Are loan amounts forgiven under PSLF considered taxable by the IRS?
No. According to the Internal Revenue Service (IRS), student loan amounts forgiven under PSLF are not considered income for tax purposes. For more information, check with the IRS or a tax advisor.

Source:
https://studentaid.ed.gov/sa/repay-loan ... nformation
 

#7
AlexCPA  
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That's where I started my research (similar to the excerpt quoted at the beginning of my initial post). However, my subsequent research of authoritative sources seems to qualify (at the very least) the information provided on these non-authoritative government websites. It's really a shame the amount of uncertainty that is faced by people with hundreds of thousands in student loan debt both from legislative and income tax perspectives.
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