Michigan Deduction for a Discharged Student Loan

A veteran whose federal student loans are discharged under the Department of Education's total and permanent disability discharge program can receive a Form 1099-C for the cancelled balance. Cancelled debt is ordinarily taxable income, and a discharge of forty or fifty thousand dollars can produce a tax bill in the year the relief arrives, which is the year the borrower has been found unable to work. Section 206.30(1)(aa), effective for tax years beginning on and after January 1, 2025, lets a disabled veteran deduct, to the extent included in adjusted gross income, income reported on a federal 1099-C attributable to the cancellation or discharge of a student loan by the United States Department of Education under the total and permanent disability discharge program at 34 CFR 685.213. Two routes in, and they are the property tax routes minus the specially adapted housing one. A disabled veteran for this subdivision is a veteran determined by VA to be permanently and totally disabled as a result of military service and entitled to benefits at the 100% rate, or a veteran rated by VA as individually unemployable. The unemployability route carries no permanence requirement here either. Why it matters even though a federal exclusion existed. The American Rescue Plan Act excluded student loan discharges from gross income for discharges occurring in 2021 through 2025, and Michigan's starting point is federal adjusted gross income, so for a discharge inside that period there was usually nothing left in adjusted gross income to subtract. For a discharge after it, the cancelled balance is back in adjusted gross income and this subdivision is what takes it out again at the state level. The Michigan deduction carries no expiry date of its own, which is what makes it worth knowing: it was written to outlast the federal provision it sat behind. It is a deduction, so it has to be claimed on the Michigan return rather than arriving automatically.