A provision in the 2021 American Rescue Plan Act, student loan forgiveness will not be taxable even if you receive a refund for federal tax purposes.
A “student loan forgiveness tax bomb” happens when your loan balance is forgiven and you must pay taxes on that amount. This primarily affects borrowers on income-driven repayment plans who've made reduced payments for years.
Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
No, the government will not take your refund (for now). But before you start celebrating, here are five things you need to know about your student loan in 2024. Your student loan interest will continue to accrue.
The law requires that you report all taxable canceled debt as income on your tax return, even if the amount is less than $600 and you didn't receive a Form 1099-C. Canceled debt is taxed at same rate as your ordinary income, which can be anywhere from 10% to 37% depending on your total taxable income.
When you receive any type of debt forgiveness for more than $600, the creditor is supposed to send you a Form 1099-C. You'll find, in box 2, an amount of tax forgiven, and you need to enter that amount on your tax return marked “other income.” The IRS generally considers forgiven debt as income for tax purposes.
Key takeaways
Since lenders require you to repay a personal loan, they are considered debt and not taxable income. If a lender forgives some or all of the loan, you may have to pay taxes on the forgiven loan amount. The IRS allows taxpayers to deduct interest on personal loan funds used for business purposes.
There are four main forgiveness programs accessible to taxpayers: Installment agreement — The most common repayment period is 72 months. The IRS recommends this if you can't pay your tax debt in full, including penalties and interest. Offer in compromise (OIC) — You offer to pay the IRS a fraction of what you owe.
The government may take your federal income tax refund if you are in default. Computer records of all borrowers in default are sent to the I.R.S. If you are in default on your federal student loans, all or a portion of your tax refund may be taken and applied automatically to your federal student loan debt.
If you account for your assessable income on a cash basis, you will not include an amount in your assessable income until it is received. Therefore, writing off, forgiving, or waiving a debt for an amount of unpaid income will have no income tax consequences for you.
If you receive full forgiveness, it'll close your loan accounts, which can affect your credit score slightly. You'll have one fewer account on your record and the average age of your accounts could decrease.
Typically, these refunds are intended to cover school-related expenses such as off-campus housing, supplies or transportation. However, there are also cases in which students have borrowed more than they actually needed, resulting in a refund check. It's important to know that refund checks are not “free” money.
Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable. Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income.
In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable. If taxable, you must report the canceled debt on your tax return for the year in which the cancellation occurred.
The $100,000 Loophole.
With a larger below-market loan, the $100,000 loophole can save you from unwanted tax results. To qualify for this loophole, all outstanding loans between you and the borrower must aggregate to $100,000 or less.
No, a creditor generally cannot collect the debt after it is forgiven and a Form 1099-C has been issued, although creditors may try to collect other debts. It might be best for you to get legal advice in this case.
Once you know your tax bracket, you'll need to consider the amount of student loan debt being forgiven. This is because the IRS generally considers forgiven debt as taxable income. For example, if $10,000 of your student loans are forgiven and you fall into the 12% tax bracket, you would owe an extra $1,200 in taxes.
How Are Taxes for Debt Settlement Calculated? How much will you owe in taxes from your debt settlement? That depends on your overall taxable income. Your income, including amounts listed on your 1099-Cs, gets taxed at the normal progressive rate, which ranges from 10% to 37%.
Collection activities are currently paused for all federal student loans through September 2024, which should protect your 2022 and 2023 federal and state tax refunds. But you may need to take action.
That means you won't have to pay back some or all of your loan(s). The terms “forgiveness,” “cancellation,” and “discharge” mean essentially the same thing.
If you don't report the taxable amount of the canceled debt, the IRS may send you a notice proposing to assess additional tax and may audit your tax return. In addition, the IRS may assess additional tax, penalties and interest.
Credit card interest is not tax-deductible for personal expenses. The government stopped allowing a tax deduction for credit card interest in the 1980s. Interest on student loans, mortgages, home equity loans, and business expenses are still tax-deductible.