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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 2970
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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What is considered earned income when it pertains to

Customer Question

what is considered earned income when it pertains to disability student loan discharge?
what is considered unearned income pertains to the same thing? I am confused if gifts, car or house sale proceeds are considered earned or unearned income if received?
Submitted: 5 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 5 months ago.

Dear Customer,

Earned income usually is income from the business activities. Unearned income is a vague term. It probably means everything which is not earned. If in a textbook setting, we can make choice of answer as such. Otherwise, we may want to use the income type by its exact name.

Let's discuss them in the setting of accounting and tax.

Say, the word of "gifts" could mean major revenue for a non-profit, tax-exempt organization. Then, in a way, it is earned income. But for most persons, it is unearned income.

In accounting, we use the account of "Other Income" to register unearned income and a sub-account to be specific about what that income is. For example, it could be the Account of "Other Income- interest", for a business.

Unearned income is a vague term and does not say much. We generally use the exact term and call the income by its name in accounting and tax.

In tax, the terms clearer are taxable income and non-taxable income.

1) "Discharged student loan" is earned income if the person or entity is in the business of obtaining such loan discharge. If this is an occasional event for an individual, we follow the procedure for forgiveness of debt to see whether it may become a taxable event on the personal tax return as other income. If the discharge makes the person from insolvent to solvent, it is taxable income but just the portion making the person solvent. For a business, if the debt is discharged, we use the discharge to debit the liability account and the difference goes to the equity account generally. It is not registered in the income account. The tax account will make the financial-to-tax adjustment. But there will be another account disagree with me. There are software more advanced and accountant more advance to register this forgiveness of debt and its tax effect simultaneously in the accounting registered.

2) Proceeds of "Car Sale" and "House Sale" is the same idea. If the entity (or a person) is in the business activities of car sales and house sale, then, they are earned income. If this is not business activity, then, we call them car sale income and house sale income. In the accounting, we register them under the salvage sale under assets account to start with if the house and the car were listed as assets on the book. In general, we probably call them proceeds from the car sale and house sale. The word of "Income" makes an accountant nervous. So, in general, we will just be very specific and call the terms exactly as they are.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Expert:  Barbara replied 5 months ago.

Different expert here - my name is ***** ***** please allow me to provide you with information to answer your SPECIFIC QUESTION.

Earned income when it pertains to disability student loan discharge is income from work/a job.

As of July 1, 2010, this discharge requires certification from a doctor that you are unable to work and earn money because of an illness or injury that is expected to result in death, last for a continuous period of not less than 60 months or can be expected to last for a continuous period of not less than 60 months (5 years).

Gifts, car or house sale proceeds are considered unearned income for purposes of disability student loan discharge.

The following links contain additional information regarding disability student loan discharges which you will find helpful:

https://www.disabilitydischarge.com/faqs/

http://www.studentloanborrowerassistance.org/loan-cancellation/disability-and-death/

Please let me know if I can assist you further.

Thank you and best regards,

Barb

Expert:  Dr. Fiona Chen replied 5 months ago.

Dear Customer,

If you submit evidence from VA and/or Social Security Administration for total disability, you don't have to submit physician verification.

https://www.disabilitydischarge.com/application-process

Earned income also include self-employment income.

The poverty level used defines also what income type is included and what is not. The poverty level of permitted income level depends on the state you reside. See enclosed link https://disabilitydischarge.com/PovertyGuidelines

Regards,

Fiona

Expert:  Barbara replied 5 months ago.

Second expert here.

Just for clarification, I mentioned that EARNED income is from work/a job. In other words, if you are self-employed or receive a W-2 from an employer.

Also to reiterate, gifts, car or house sale proceeds are NOT considered earned income for disability student loan discharge purposes.

Best regards,

Barb