President Joe Biden recently announced a widespread student debt relief program that will cancel up to $20,000 in federal student loans for single borrowers who earn less than $125,000 annually and married borrowers who file taxes jointly and earn less than $250,000 annually.
Now that the program has been announced, borrowers have questions about what the legal and tax implications will be of this loan forgiveness. One specific question that has been asked is whether the amount forgiven is considered taxable income?
Normally, any debt that is forgiven is considered taxable income by the IRS and is subject to income taxes. For example, if a consumer is working with a creditor on a debt settlement, any amount forgiven as part of that settlement will be considered taxable income.
However, according to the Biden administration, student loans forgiven under this new program are exempt from federal taxation. This relief is provided courtesy of the American Rescue Plan Act, a COVID-19 relief bill sponsored by the Biden administration and passed into law in 2021. This law allows taxpayers to exclude any canceled federal student loan debt from their income taxes through the end of 2025.
Taxpayers normally receive an IRS Form 1099-C from their creditors, reporting any amount of forgiven debt, and this form is filed along with the taxpayer’s income taxes if the forgiven amount is more than $600.
When it comes to this student loan forgiveness, the IRS has directed student loan providers to not file or provide 1099-C forms to qualifying borrowers since this debt is not considered taxable income.
One important matter that consumers should keep in mind is that this tax relief comes with an expiration date of 2025. After this period, any additional loan forgiveness is considered taxable unless Congress creates legislation to extend it.
Certain states have chosen to not consider this forgiven amount as not taxable with respect to state income taxes. These states include Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin although reports have differed as to how many states will do this. Initially, the report was 13 states, while more recent reports have stated seven will tax this forgiven debt.
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For borrowers who are struggling with student loan debt, relief options are available. Many student loan borrowers are unaware that they have rights and repayment options available to them, such as postponement of loan payments, reduction of payments or even a complete discharge of the debt. There are ways to file for bankruptcy with student loan debt. It is important you contact an experienced Miami bankruptcy attorney who can advise you of all your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.