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Biz Brain: Couple has to pay income taxes on $20000 loan when it's forgiven ...

22.05.12

Q. Our son took out a student allow with a bank for $20,000. My wife and I co-signed the loan. He also took out other loans that did not require a co-signer. Our son passed away in February, and my chain was administrator of his estate, valued at approximately $1,100. She sent the required downfall certificates to all of his creditors and all of the loans were forgiven due to his death, but there was one difference for the loan we co-signed. That bank said they’d void it, but that as co-signers of the loan, we would have to consider the forgiven amount as ordinary income. This does not resonate correct to us. We did not realize any income from the loan forgiveness, only the sorrow of the loss of our son. Is this unimpeachable? Can any "income" we realize be offset by funeral and other expenses?

— Dear old dad

A. Deepest condolences on the end of your son.

We’re afraid the news here isn’t good.

Because you and your wife co-signed your son’s student allow, you were personally responsible for payment to the extent his assets were insufficient, said Catherine Romania, an stratum planning attorney with Witman Stadtmauer in Florham Park.

"As a result of the bank lenient the debt, you received a benefit in the form of additional funds being retained by you, which funds would have been utilized to pay the loan if not forgiven," she said.

The Internal Revenue Code specifically includes this quintessence of discharge of indebtedness or cancellation of debt in gross income.

"There are exceptions, such as suppuration which occurs in bankruptcy or if the debt is qualified principal residence indebtedness, however, the exceptions do not hidey-hole your circumstances," Romania said. "Although you will have to include the loan balance as income on your federal profits tax return, you will not have to include it on your New Jersey income tax return, as New Jersey does not delineate gross income as including such a benefit."

The bank will send you a 1099 for the forgiven credit amount, said Michael Maye, a certified financial planner and certified projected accountant with MJM Financial in Berkeley Heights.

He said the bank was under no obligation to exculpate the loan, so owing the income taxes on $20,000 rather than the full $20,000 is by far the lesser of two evils, he said.

For archetype, if your marginal tax bracket for federal income tax purposes is 15 percent, you will owe mercilessly $3,000 in federal income taxes.

"Clearly owing $3,000 rather than the full $20,000 is a much more safely a improved result," Maye said.

Unfortunately, the other expenses you incurred -- such as the cremation -- are considered personal expenses by the IRS. As a result, they are not tax deductible and can’t countervail the loan forgiveness income, Maye said.

Funeral expenses are only deductible on a federal or New Jersey capital tax return and not on an income tax return, but because your son’s estate was minimal, no estate tax exchange was necessary, Romania said.

Email your questions to Karin Price Mueller at askbiz@starledger.com .

Source: The Star-Ledger - NJ.com

Are You Optimistic or Pessimistic About Financial Aid?

22.05.12

My prospect is that it’s easy to be pessimistic just looking at the numbers, but you have power to set yourself up for achievement, and there are lots of resources you can and should take advantage of. EducationUSA centers are really important resources. Lists of schools that give the most fiscal aid to international students can help you figure out where to start your search. Websites that let you search at private and government scholarship programs to figure out what you’re eligible for. Webinars to helpers you understand how to apply for scholarships and financial aid. International admissions officers and foreign student service offices at schools you’re interested in to help you understand what might be ready at that school.

Yes, it’s a lot of research and legwork to sift through all these things and apply to all the manifold things, but the point is that I feel like a lot of people get discouraged and give up BEFORE they’ve definitely tried the things that are out there, and my goal with posting this sort of information, and particularly with posting the Friday lists of upcoming webinars and online events, is to remedy empower you to find the opportunities.

Source: Voice of America (blog)