What tax will you be subject to if your student loan forgiveness is granted in 2023? Key Details

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The Biden administration has launched multiple student loan forgiveness programs, including temporary or one-time waivers, an extension to the ongoing student loans pause and an expansion of existing loan forgiveness programmes. The Limited PSLF Waiver has granted student loan forgiveness totalling $24Billion.

The tax landscape for student loan forgiveness has become more complicated as the tax season approaches. Here are some things borrowers should know.


Background: Students Loan Forgiveness Can be Taxable

Any type of debt, including student loan debt, can be forgiven, cancelled or reduced. This could have tax consequences. The lender will issue the debtor a Form1099-C. This is a tax form that shows the amount of cancelled or forgiven debt. This form is usually issued in tax season for the year prior to the cancellation. If you have a debt that was forgiven in 2022 you may receive a Form 1099 C in the early 2023. The form is sent to federal and state taxing authorities. It requires that the borrower declare the cancelled debt as income on their tax returns. This could lead to higher income taxes.

Certain tax exemptions have been provided by federal law for debts that have been cancelled. In some cases, the borrower might be able claim that the debt was invalid or disputed. Insolvency can be used to reduce or eliminate tax liabilities in situations where total debts exceed assets.

However, while general debt cancellation can often result in the issuance a Form 1099C, which could be taxable and it may be tax deductible, student loan forgiveness is much more complex, especially at this moment.

Temporarily Exempt from Tax Federal Student Loan Forgiveness

Federal law temporarily exempts federal student loan forgiveness, cancellation, or discharge. Federal student loan forgiveness was exempted from federal taxation by the American Rescue Plan Act of 2121 until 2025. The following programs offer federal student loan forgiveness:

The American Rescue Plan Act of 2021 exempts federal student loans from federal taxation. However, it does not exempt borrowers from state income taxes. Many states have policies or laws that mirror federal tax treatment for debt cancellation events. This is not always the case. In certain circumstances, a student loan forgiven borrower may be subject to state taxation.

The Future may be Taxable for Federal Student Loan Forgiveness

All federal student loan forgiveness is temporarily exempt from tax at the federal level. However, this exemption is only temporary according to the American Rescue Plan Act 2021. The tax relief will expire at the end 2025 unless Congress extends them or makes them permanent by new legislation.

The federal tax treatment for student loan forgiveness will then be the same as it was before the Act’s passage. This prior tax system did not allow for profession-based student loan forgiveness like PSLF to be taxable under federal law. The IRS also issued prior guidance that stated that federal tax would not apply to loan discharges made under the Borrower Defense to Repayment Program. However, student loan forgiveness under Income Driven Repayment (IDR), plans will become taxable beginning in 2026.

Separate tax legislation that Congress passed in 2017 does not allow for the taxation of discharges made under the TPD Discharge program. This legislation, however, also expires in 2025. TPD discharges that Congress fails to renew or extend could be subject to federal tax starting in 2026.

Private Student Loan Cancellation and Forgiveness Could be Taxable

Federal student loan forgiveness programs and relief programs such as IDR, PSLF, and Borrower Defense to Repayment are not available for private student loans. Private student loans may sometimes be forgiven if the borrower becomes disabled or dies. Sometimes, private student loans that are in default can be paid off for less than the amount owed. This results in partial cancellation.

Taxable cancellation of any private student loan could result. The American Rescue Plan Act of 2121 includes a tax exemption provision. It applies to any private education loan (as per section 140(a),(7) of the Truth in Lending Act) from 2025. It is not clear if this exemption applies to all private student loans or any private student debt reduction or discharge event such as a negotiated agreement. The IRS has not provided clear guidance.


Borrowers Need to Consult with a Qualified Tax Professional

Due to the interplay between federal and state laws, student loan forgiveness should be discussed with qualified tax professionals such as a Certified Public Accountant or tax attorney. Borrowers who have received student loan forgiveness in 2022, or expect to receive it in2023, should consult a tax professional such as a Certified Public Accountant or tax attorney. To avoid making costly mistakes in tax reporting, it is important that borrowers understand their legal rights.


Additional Student Loan Forgiveness Reading


Student Loan Forgiveness: These Deferment And Forbearance Periods May Count

This is the Biden’s new plan. Here are the details: What you’ll pay and when you’ll get student loan forgiveness

The process of student loan forgiveness is getting delayed, and it may get worse

Education Department clarifies eligibility for one-time adjustment in big student loan forgiveness update

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Alexandra Williams
Alexandra Williams
Alexandra Williams is a writer and editor. Angeles. She writes about politics, art, and culture for LinkDaddy News.

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