Notice to Taxpayers Regarding Income Tax Deduction for Income Attributed to Cancellation or Discharge of a Student Loan for Disabled Veterans

Issued:  March 14, 2022

On December 8, 2021, Public Act 120 of 2021 (PA 120) was signed into law. PA 120 provides a disabled veteran an individual income tax deduction for income that is attributable to the cancellation or discharge of certain student loan debt. Generally, cancellation of debt results in taxable income to the debtor. PA 120 is retroactive and effective for tax years 2016, 2017, 2018 and 2019, not in effect for tax years 2020, 2021, 2022, 2023 and 2024 tax years, but in effect again for tax years that begin on and after January 1, 2025.[1]

A "disabled veteran" means an individual who has been determined to be permanently and totally disabled as a result of military service and entitled to 100% of their veterans' benefits or is individually unemployable as determined by the U.S. Department of Veterans Affairs.

A taxpayer who is a disabled veteran may deduct, to the extent included in the taxpayer's adjusted gross income, income reported on the taxpayer's federal income tax form 1099-C that is attributable to the cancellation or discharge of a student loan by the U.S. Department of Education pursuant to the total and permanent disability discharge program described in federal regulation 34 CFR 685.213.  The taxpayer may report the deduction on an amended 2016, 2017, 2018 and/or 2019 Michigan Individual Income Tax Return (Return), as applicable, that is filed within the statute of limitations period under section 27a of the Revenue Act.[2] 

A taxpayer who files an amended return to deduct the cancellation or discharge of a student loan must provide documentation to show eligibility for the deduction. The disabled veteran should be prepared to provide a copy of documentation of disabled veteran status as determined by the U.S. Department of Veterans Affairs. In addition, the veteran must provide a copy of the individual's federal Form 1099-C and Schedule 1 for the applicable tax year to support the deduction.[3]

[1] The deduction is not in effect for tax years 2020, 2021, 2022, 2023 and 2024 because federal law excludes the cancellation or discharge of such student debt from income during those years.

[2] MCL 205.27a.

[3] For most taxpayers, tax year 2016 is outside the statute of limitations, making those taxpayers ineligible for the deduction.