Expanded Tax Relief on State Loan Repayment, Forgiveness Programs Benefits Physicians, Medically Underserved Individuals

Health Care Reform Provision May Prompt More Service Commitments

July 27, 2010 05:40 pm Barbara Bein

Physicians who have received student loan forgiveness as an incentive to practice in medically underserved areas of their states may be eligible for some relief from federal income taxes on those loan amounts.

Under Section 10908 of the new Patient Protection and Affordable Care Act, an existing tax exclusion has been expanded to include health professionals in 16 states who are enrolled in these types of state loan repayment or loan forgiveness programs. Moreover, the exclusion is being applied retroactively to 2009, which means that program participants in these states may be eligible for a tax refund.

According to a press release from the Internal Revenue Service(www.irs.gov), or IRS, the exclusion was expanded as part of efforts to strengthen the health care workforce.

"Doctors and nurses who choose to practice in underserved areas make a great contribution to their local communities," said IRS Commissioner Doug Shulman in the press release. "By expanding the tax exclusion for student loan forgiveness, the (Patient Protection and) Affordable Care Act provides an even greater incentive to practice medicine in areas that need it most."

The expanded tax exclusion was championed by Sen. Ben Nelson, D-Neb., and was strongly supported by the AAFP. Nelson's Health Professionals State Loan Repayment Tax Relief Act of 2009 was incorporated into the new health care reform law.

Nelson told AAFP News Now that the need for the tax relief legislation became clear after Congress passed a law in 2004 that cut taxes on loan repayments for health professionals participating in federal loan programs or state loan programs operating under federal guidelines. But he said the law excluded health professionals participating in similar state-specific loan programs that targeted rural areas or areas with shortages of professionals, including those in Nebraska.

"I fought to get these state programs the same exemption because so many communities in Nebraska are facing a shortage of rural medical professionals," Nelson said. "This new provision will encourage doctors and nurses to work in our nation's rural areas, where rural health facilities are a vital cornerstone of communities."

According to Teresa Baker, government relations representative in the AAFP's Division of Government Relations, before passage of the Patient Protection and Affordable Care Act, only loan repayment programs sponsored by the National Health Service Corps, or NHSC -- a federal program designed to place primary care physicians and other primary care health professionals in health professional shortage areas -- and certain state programs modeled after it received individual federal income tax exemptions.

Thus, amounts awarded under state loan repayment or forgiveness programs in Nebraska and 15 other states (see sidebar above) were subject to the tax. According to the new health care reform law, these awards are no longer considered income subject to federal taxation.

Former NHSC Scholar Praises New Tax Exclusion

As a former National Health Service Corps, or NHSC, Scholarship recipient, Tanya Anim, M.D., of Daytona Beach, Fla., knows the value of the federal income tax exclusion that now has been extended to include loan amounts negotiated through NHSC-style state loan repayment and forgiveness programs in 16 states under the newly enacted Patient Protection and Affordable Care Act.

A 2010 graduate of the Florida State University College of Medicine in Tallahassee, Anim called the development a "wonderful change."

"If we intend to assist medical students who want to go into primary care and perform a much-needed service to the public, we should do as much to assist them financially as possible," she told AAFP News Now. "That includes giving them tax breaks on the very scholarship that is supposed to be used to encourage them to do so."

Moreover, says the IRS press release, health care professionals participating in these programs who already have reported income from repaid or forgiven loan amounts on their 2009 returns -- possibly after receiving a Form W-2 Wage and Tax Statement or a Form 1099 -- may be owed refunds.

Individuals who think they may qualify for the refunds should consult their state loan program offices to determine if the program is covered by the new law, according to the press release.

Health care professionals who have not yet filed taxes for 2009 -- for example, because they filed for extensions -- do not have to report eligible loan repayment or forgiveness amounts when they file. Those who already have filed may exclude eligible amounts by filing an amended U.S. Individual Income Tax Form.

In addition, the IRS says that individuals whose employers withheld and paid taxes under the Federal Insurance Contributions Act, or FICA -- which funds the Social Security and Medicare programs -- on payments covered under the new exclusion may request that the employers seek refunds of withheld FICA tax amounts on behalf of their employees.

Because employers also pay a portion of the FICA tax, they also may be entitled to a refund, according to the IRS.


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