Some loan forgiveness programs are taxable and a few aren’t . Under current law, the quantity forgiven generally represents taxable income for tax purposes within the year it’s written off. There are, however, a couple of exceptions. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the scholar working for a selected number of years in certain professions.
Public service loan forgiveness, teacher loan forgiveness, school of law loan repayment assistance programs and therefore the National Health Service Corps Loan Repayment Program aren’t taxable. Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income. The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is taken into account taxable income.
Section 61(a)(12) of the interior Revenue Code of 1986 (IRC) specifies that gross income includes income from the discharge of indebtedness of $600 or more in any civil year . However, IRC Section 108(f) specifies conditions under which student loan forgiveness is excluded from income. Specifically, IRC section 108(f)(1) states that
In the case of a private , gross income doesn’t include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or a part of the indebtedness of the individual would be discharged if the individual worked for a particular period of your time in certain professions for any of a broad class of employers.
If you’ve been dealing with student loans for some time, you know that the number of forgiveness programs is quite numerous. However, you’ll find that the eligibility requirements can be quite tricky if you would like to consider them. It doesn’t get any better when you need to fulfill tax obligations on your forgiven student loans. Hence, we’ll look at student loan forgiveness and taxable income, so as to understand how and where these two intersect.
As a consumer, the moment your debts get canceled, there are times that the IRS receives a report because they consider this an income that you earned. As a result, the IRS may expect you to pay money taxes on this income. Just as you would for money earned through a business transaction. Hence, the student loan forgiveness and taxable income problem. Usually, you will receive a 1099-C form from your lender when it’s the tax season for the year before to cover canceled debts.
For instance, let’s say a student borrows a total of $20,000 loan and this gets cancellation in February 2020. For this, she will receive 1099-C in the first quarter of 2021. The moment the form is received, it should tell that the student has student loan taxable income. Usually, you’ll have to spend a considerable amount of money on these taxes.
It might seem hard to consider your student loan forgiveness taxable income. However, you need to be ready to deal with the reality even though not all forgiven student loans are taxable. Hence, let’s take a closer look at it.