guarantor of student loan and 1099-C

[DEC-1982]

I was a cosigner with another individual on a student loan some years ago. The loan was partially written off in October 2024. We received a 1099-C in the mail yesterday. The financial institution is DIscover Bank (Discover Student Loans).

As I understand this,

https://www.irs.gov/pub/irs-dft/i1099ac--dft.pdf

"7. Guarantor or surety. You are not required to file Form 1099-C for a guarantor or surety. A guarantor is not a debtor for purposes of filing Form 1099-C even if demand for payment is made to the guarantor."

I am faced with some choices:

I can contact the lender asking them to remove me from the 1099-C, but I understand that companies won't do that if the amount written off is greater than $10,000. I believe this is true for Sallie Mae.

1. I file for taxes (paper) with a letter explaining why I didn't show the amount as taxable income. But attracting attention from the IRS may be a bad idea.

2. I file for taxes electronically (not including this 1099-C as income). If the IRS comes knocking on my door now or later, I explain that I was a guarantor and not the primary borrower and show the appropriate paperwork at that time.

3. I can just show this in my income (Schedule 1 Part 1 Additional Income 8c Cancellation of debt ) and write this off as lessons learnt.


And finally, what happens if the primary borrower does not show it on his income? It's his problem but is it also my problem if I went with option 2?

 

[cathy63]

So were you a cosigner or a guarantor? You originally said cosigner, which means you were liable and should get a 1099-C; but then you quoted the 1099-C instructions for a guarantor, which is different.

The fact that you got a 1099-C indicates that the lender believes you were a cosigner. Do you have the original paperwork you signed that identifies your role in the transaction?

There are some types of student loan forgiveness that aren't taxable, but I don't know much about those. I did a tax return a couple of years ago for someone whose son (the borrower) had died and I did some research then, so it's been a while. I remember death and disability were exemptions, as well as some cases where for-profit schools had gone out of business. You might look into this and see if there's anything you can do. If you do qualify for an exemption, you have to contact the lender to get the form corrected. If they don't issue a corrected form, the IRS will believe them over you.

If you determine that you were a cosigner and the debt forgiveness is taxable, then it goes on Schedule 1 line 8c, as you described. If the primary borrower doesn't put it on his tax return, the IRS will go after him separately. They don't know or care that there were two borrowers. You are both supposed to report it.

 

[SecondCor521]

Agree with cathy63. I would add a comment that some student loan forgiveness is not taxable under 26 USC 108 108(f), in particular sub-paragraph (5) - search for "Special rule for discharges in 2021 through 2025" at 26 U.S. Code § 108 - Income from discharge of indebtedness. This section of law was passed as part of the American Rescue Plan Act.

There is an option 4:

4. If you determine that the COD is not taxable to you, then you can file your return with the COD reported as a positive amount on line 8c, then enter an equal but negative offset amount on line 8z with an adequate description like "8c COD not taxable guarantor" or "COD not taxable 26 USC 108(f)" whatever. This properly acknowledges receipt of the 1099-C so the IRS matching computers will be happy, but also makes your tax position clear.

This approach of reporting income then backing it out is also used in other situations, such as a 1099-K for reimbursements or sales of personal items at a loss.

 

[DEC-1982]

So were you a cosigner or a guarantor? You originally said cosigner, which means you were liable and should get a 1099-C; but then you quoted the 1099-C instructions for a guarantor, which is different.

The fact that you got a 1099-C indicates that the lender believes you were a cosigner. Do you have the original paperwork you signed that identifies your role in the transaction?

I am a cosigner. I have read elsewhere that in this kind of situation, the cosigner is treated like a guarantor, and that's why I quoted the instructions.

I don't have the original paperwork, but I do have some correspondence from the lender that mentions who the primary signer is and that I am the cosigner.

 

[DEC-1982]

Agree with cathy63. I would add a comment that some student loan forgiveness is not taxable under 26 USC 108 108(f), in particular sub-paragraph (5) - search for "Special rule for discharges in 2021 through 2025" at 26 U.S. Code § 108 - Income from discharge of indebtedness. This section of law was passed as part of the American Rescue Plan Act.

There is an option 4:

4. If you determine that the COD is not taxable to you, then you can file your return with the COD reported as a positive amount on line 8c, then enter an equal but negative offset amount on line 8z with an adequate description like "8c COD not taxable guarantor" or "COD not taxable 26 USC 108(f)" whatever. This properly acknowledges receipt of the 1099-C so the IRS matching computers will be happy, but also makes your tax position clear.

This approach of reporting income then backing it out is also used in other situations, such as a 1099-K for reimbursements or sales of personal items at a loss.

Thank you. I will give a great deal of thought to this approach (option 4).

Showing the negative amount in line 8z with a description ...
If I decide to do this, and if the IRS disagrees with this, then I could always pay the additional tax, plus any interest and penalties that they deem appropriate.

 

[Koolau]

Thank you. I will give a great deal of thought to this approach (option 4).

Showing the negative amount in line 8z with a description ...
If I decide to do this, and if the IRS disagrees with this, then I could always pay the additional tax, plus any interest and penalties that they deem appropriate.

Is there enough money involved to run this past a tax professional?

 

[DEC-1982]

It's a good thought. I will give this also plenty of consideration.

 

[38Chevy454]

Did the signor also get the same 1099-C? If so, then that person should report the income from the forgiven debt, and not you. Otherwise the IRS is collecting income from two returns for the same debt? Or do I understand this correctly?

 

[Sunset]

I thought a co-signer was on the hook for paying if the primary borrower didn't pay.
Wondering how OP got out of paying ?

 

[DEC-1982]

Did the signor also get the same 1099-C? If so, then that person should report the income from the forgiven debt, and not you. Otherwise the IRS is collecting income from two returns for the same debt? Or do I understand this correctly?

Yes, this is my understanding

 

[engineernerd]

DEC-1982, did each of your 1099-Cs show the full amount of the forgiven debt, or was it split into equal shares?

There is unfortunately a key difference between a cosigner and a guarantor. A cosigner is legally just an additional borrower. If the student fails to pay and the cosigner pays instead, the cosigner cannot legally recover anything from the student (cannot use the legal system against the student) and cannot deduct a bad-debt loss on his or her taxes.

A guarantor, but not a cosigner, could take advantage of the logic described in the last paragraph, titled "Section 108(e)(2)", of this IRS document: https://www.irs.gov/pub/irs-wd/02-0024.pdf

I think your best bet is to try and figure out if this loan qualifies for the Special rule for discharges in 2021 through 2025 as shared by SecondCor521. If it does, then both you and the student should be able to take advantage.

 

[pb4uski]

Do you have any idea if the 1099-C amount is 100% of the amount forgiven or 50% of the amount forgiven? Also, if 100%, did the primary obligor also receive a 1099-C? I assume that your 1099-C has your SSN?

I think the important thing is that between your return and the primary obligor's return that the entire amount forgiven be reported if it is taxable and doesn't qualify for a full or partial exclusion. Are you and the primary obligor still in touch? Perhaps even if they report it the tax impact would be nil or lower and you can work something out for them to report it, in writing so you have documentation for your tax records that they were reporting it.

 

[DEC-1982]

DEC-1982, did each of your 1099-Cs show the full amount of the forgiven debt, or was it split into equal shares?

My 1099-C is for the full amount of debt forgiven. The student says he never got a 1099-C, and I think that's because of address changes but I can't be sure.

 

[DEC-1982]

Do you have any idea if the 1099-C amount is 100% of the amount forgiven or 50% of the amount forgiven? Also, if 100%, did the primary obligor also receive a 1099-C? I assume that your 1099-C has your SSN?

I think the important thing is that between your return and the primary obligor's return that the entire amount forgiven be reported if it is taxable and doesn't qualify for a full or partial exclusion. Are you and the primary obligor still in touch? Perhaps even if they report it the tax impact would be nil or lower and you can work something out for them to report it, in writing so you have documentation for your tax records that they were reporting it.

Yes, my 1099-C has my SSN for the full amount. As I said in post #13, the student says he never received a 1099-C.

 

[DEC-1982]

I was torn between
option 1, not including the amount but providing an explanation
and
option 4, showing it and then showing a negative adjustment for the same amount

After Koolau's post, I decided to consult with a tax professional. This is what I should probably have done in the first place. The professional said

1) check to make sure the student is including the amount forgiven in his tax filing
2) if the student is including the amount forgiven, then don't include it in ours but provide an explanation

When I checked with the student, he told me he never received a 1099-C so he is not going to include it. In his words "how can I include it when I never received the 1099-C"

I felt that at least one of the two parties (student or us) needs to include it in the filing. I have included it in our filing.

I calculated the difference for our taxes between including it and not including it. Since both Federal and State changed, the difference is the sum of the two differences, Fed and State. I told the student he needed to pay us the difference. He agreed to pay us that amount within the next 10 days. So our problem has (hopefully) been solved.

If the IRS goes after the student later, it's not really my problem. If the student asks, I will be happy to provide my SSN for the IRS to check that at least one of us paid the taxes.

 

[engineernerd]

Did you ask that tax professional about 26 USC 108(f)(5)? Here's a link to Section 108:

U.S.C. Title 26 - INTERNAL REVENUE CODE

and here I copy-pasted the relevant text:

(5) Special rule for discharges in 2021 through 2025​

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) after December 31, 2020, and before January 1, 2026, of—

(A) any loan provided expressly for postsecondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if such loan was made, insured, or guaranteed by—
(i) the United States, or an instrumentality or agency thereof,
(ii) a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof, or
(iii) an eligible educational institution (as defined in section 25A),

(B) any private education loan (as defined in section 140(a)(7) 1 of the Truth in Lending Act),

(C) any loan made by any educational organization described in section 170(b)(1)(A)(ii) if such loan is made—
(i) pursuant to an agreement with any entity described in subparagraph (A) or any private education 2 lender (as defined in section 140(a) of the Truth in Lending Act) under which the funds from which the loan was made were provided to such educational organization, or
(ii) pursuant to a program of such educational organization which is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in section 501(c)(3) and exempt from tax under section 501(a), or

(D) any loan made by an educational organization described in section 170(b)(1)(A)(ii) or by an organization exempt from tax under section 501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization but only if the refinancing loan is pursuant to a program of the refinancing organization which is designed as described in subparagraph (C)(ii).

The preceding sentence shall not apply to the discharge of a loan made by an organization described in subparagraph (C) or made by a private education 2 lender (as defined in section 140(a)(7) of the Truth in Lending Act) if the discharge is on account of services performed for either such organization or for such private education lender.

 

[DEC-1982]

Did you ask that tax professional about 26 USC 108(f)(5)? Here's a link to Section 108:

Thanks for posting this. No, I didn't ask about this. The student told me there were some cases brought to court about this loan forgiveness amount not being taxable, and that he was investigating them.

From my perspective, at this point I consider this issue closed.