Page 71 - 2020 Publication 17

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Stockholder debt. If you’re a stockholder in a Repayment Program (NHSC Loan Repayment 14:38 - 19-Jan-2021
corporation and the corporation cancels or for- Program), a state education loan repayment Life Insurance
gives your debt to it, the canceled debt is a con- program eligible for funds under the Public Proceeds
structive distribution that’s generally dividend Health Service Act, or any other state loan re-
income to you. For more information, see Pub. payment or loan forgiveness program that’s in-
542, Corporations. tended to provide for the increased availability Life insurance proceeds paid to you because of
If you’re a stockholder in a corporation and of health services in underserved or health pro- the death of the insured person aren’t taxable
you cancel a debt owed to you by the corpora- fessional shortage areas aren’t taxable. unless the policy was turned over to you for a
tion, you generally don’t realize income. This is Deductible debt. You don’t have income from price. This is true even if the proceeds were
because the canceled debt is considered as a the cancellation of a debt if your payment of the paid under an accident or health insurance pol-
contribution to the capital of the corporation debt would be deductible. This exception ap- icy or an endowment contract. However, inter-
equal to the amount of debt principal that you plies only if you use the cash method of ac- est income received as a result of life insurance
canceled. counting. For more information, see chapter 5 proceeds may be taxable.
Repayment of canceled debt. If you included of Pub. 334, Tax Guide for Small Business. Proceeds not received in installments. If
a canceled amount in your income and later pay Price reduced after purchase. In most ca- death benefits are paid to you in a lump sum or
the debt, you may be able to file a claim for re- ses, if the seller reduces the amount of debt you other than at regular intervals, include in your
fund for the year the amount was included in in- owe for property you purchased, you don’t have income only the benefits that are more than the
come. You can file a claim on Form 1040-X if income from the reduction. The reduction of the amount payable to you at the time of the in-
the statute of limitations for filing a claim is still debt is treated as a purchase price adjustment sured person's death. If the benefit payable at
open. The statute of limitations generally and reduces your basis in the property. death isn’t specified, you include in your income
doesn’t end until 3 years after the due date of the benefit payments that are more than the
your original return. Excluded debt. Don’t include a canceled debt present value of the payments at the time of
in your gross income in the following situations. death.
Exceptions • The debt is canceled in a bankruptcy case Proceeds received in installments. If you re-
under title 11 of the U.S. Code. See Pub. ceive life insurance proceeds in installments,
There are several exceptions to the inclusion of 908, Bankruptcy Tax Guide. you can exclude part of each installment from
canceled debt in income. These are explained • The debt is canceled when you’re insol- your income.
next. vent. However, you can’t exclude any To determine the excluded part, divide the
Student loans. Certain student loans contain amount of canceled debt that’s more than amount held by the insurance company (gener-
ally, the total lump sum payable at the death of
a provision that all or part of the debt incurred to the amount by which you’re insolvent. See the insured person) by the number of install-
attend the qualified educational institution will Pub. 908. ments to be paid. Include anything over this ex-
be canceled if you work for a certain period of • The debt is qualified farm debt and is can- cluded part in your income as interest.
time in certain professions for any of a broad celed by a qualified person. See chapter 3
class of employers. of Pub. 225, Farmer's Tax Guide. Surviving spouse. If your spouse died be-
You don’t have income if your student loan fore October 23, 1986, and insurance proceeds
is canceled after you agreed to this provision • The debt is qualified real property business paid to you because of the death of your
and then performed the services required. To debt. See chapter 5 of Pub. 334. spouse are received in installments, you can
qualify, the loan must have been made by: • The cancellation is intended as a gift. exclude up to $1,000 a year of the interest in-
cluded in the installments. If you remarry, you
1. The federal government, a state or local • The debt is qualified principal residence in- can continue to take the exclusion.
government, or an instrumentality, agency, debtedness.
or subdivision thereof; Surrender of policy for cash. If you surren-
der a life insurance policy for cash, you must in-
2. A tax-exempt public benefit corporation Host or Hostess clude in income any proceeds that are more
that has assumed control of a state, than the cost of the life insurance policy. In most
county, or municipal hospital, and whose If you host a party or event at which sales are cases, your cost (or investment in the contract)
employees are considered public employ- made, any gift or gratuity you receive for giving is the total of premiums that you paid for the life
ees under state law; or the event is a payment for helping a direct seller insurance policy, less any refunded premiums,
3. An educational institution: make sales. You must report this item as in- rebates, dividends, or unrepaid loans that
come at its fair market value.
weren’t included in your income.
a. Under an agreement with an entity de- Your out-of-pocket party expenses are sub- You should receive a Form 1099-R showing
scribed in (1) or (2) that provided the ject to the 50% limit for meal expenses. For tax the total proceeds and the taxable part. Report
funds to the institution to make the years 2018 through 2025, no deduction is al- these amounts on lines 5a and 5b of Form 1040
loan, or lowed for any expenses related to activities or 1040-SR.
b. As part of a program of the institution generally considered entertainment, amuse- More information. For more information, see
designed to encourage its students to ment, or recreation. Taxpayers may continue to Life Insurance Proceeds in Pub. 525.
serve in occupations with unmet deduct 50% of the cost of business meals if the
needs or in areas with unmet needs taxpayer (or an employee of the taxpayer) is
and under which the services provi- present and the food or beverages are not con- Endowment Contract
ded by the students (or former stu- sidered lavish or extravagant. The meals may Proceeds
dents) are for or under the direction of be provided to a current or potential business
a governmental unit or a tax-exempt customer, client, consultant, or similar business An endowment contract is a policy under which
organization described in section contact. Food and beverages that are provided you’re paid a specified amount of money on a
501(c)(3). during entertainment events will not be consid- certain date unless you die before that date, in
A loan to refinance a qualified student loan ered entertainment if purchased separately which case the money is paid to your designa-
from the event.
will also qualify if it was made by an educational ted beneficiary. Endowment proceeds paid in a
institution or a qualified tax-exempt organization For more information about the 50% limit for lump sum to you at maturity are taxable only if
under its program designed as described in meal expenses, see Pub. 463, Travel, Gift, and the proceeds are more than the cost of the pol-
item 3b above. Car Expenses. icy. To determine your cost, subtract any
amount that you previously received under the
Education loan repayment assistance. contract and excluded from your income from
Education loan repayments made to you by the the total premiums (or other consideration) paid
National Health Service Corps Loan for the contract. Include in your income the part
Chapter 8 Other Income Page 67