We will keep this as simple as possible.
On any given day that you have a debt forgiven, the Internal Revenue Service (IRS), treats it as taxable income. Debt forgiveness amounts get reported on form 1099-C and added to your gross income on the tax return of year received.
Q. Federal Student Loan forgiveness is technically a forgiveness of a debt, correct?
Q. Does that mean I will pay taxes on the forgiveness of my student loan?
Federal Tax Impact
Joe Biden signed the American Rescue Plan that has a clause stating that any federal student loans forgiven between 2021 and 2025 are not taxable income at the federal level.
Therefore, student loan forgiveness will have no impact on what you pay in taxes on your federal income tax return.
State Tax Impact
The states are tricky as we find ourselves in a situation where we must look state by state to see if we are expecting an income tax levy on student loan debt forgiven.
Fourteen states could potentially treat Biden’s student loan forgiveness initiative as taxable income to borrowers.
These are the states and their current stance as of September 6th, 2022, at 5:30 PM:
Arkansas – Undecided
Hawaii – Currently No Tax Levy
Idaho – Currently No Tax Levy
Indiana – Potential to Levy Income Tax
Kentucky – Currently No Tax Levy
Massachusetts – Currently No Tax Levy
Minnesota – Undecided
Mississippi – Potential to Levy Income Tax
New York – Currently No Tax Levy
North Carolina – Potential to Levy Income Tax
Pennsylvania – Currently No Tax Levy
Virginia – Currently No Tax Levy
West Virginia – Undecided
Wisconsin – Undecided
In the coming months we expect to see additional guidance issued by the individual states.
SCOPE will make sure that we continue to keep our materials updated where we expect legislative fixes that will result in thislist to dwindle further and further.
Q. How do I know what I would owe if I received forgiveness?
A. While we do not know today the finite detail of the way federal student loan forgiveness would work, we recommend this calculation as a base.
Take the amount of student loan forgiveness on 1099-C / Cancellation of Debt (COD)
State income tax bracket, you are in
Estimated amount owed in income tax pertaining to student loan forgiveness.
FAQS – Student Loan Forgiveness
Q. Have I received Student Loan Forgiveness?
A. You must apply for student loan forgiveness so if you have not completed an application, you have not received it. It is not an automatic distribution of cash like a few of the previous federal aid disbursements across the pandemic.
Q. Do I qualify for Student Loan Forgiveness?
A. Forgiveness is for federal student loans and does not include the private student loan sector.
You must be earning less than $125,000 ($250,000 for married couples) and meet several other requirements including having an eligible employer.
To learn more about the program and eligibility requirementsvisit: https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service
Q. At the end of 2022, can SCOPE help me file my tax return?
A. Yes, you can reach out to us for a Free Mid-Year Tax Review,and we can get you on track to file your 2022 taxes with us in early 2023.
Opinions, analysis, and other commentary are not endorsed by any third party and should not be taken as legal or tax advice