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Is Student Loan Forgiveness Taxable? – Why your IRS federal tax returns hold the answer

What is the New Federal Student Loan Forgiveness Plan?

As of August 24, 2022, the Biden Administration announced a three-part plan to cancel certain amounts of federal student loan debt. The Student Loan Forgiveness Program aims to address the inflated costs of college tuition and make it easier to pay off existing students loans.

Part 1 will extend the student loan repayment pause until December 31, part 2 will provide targeted debt relief cancellations to middle and low-income families, and part 3 aims to make navigating the current student loan system more manageable.

Who is Eligible for Relief and What is Covered?

Look to the IRS and your tax filings to determine your eligibility for Biden’s student loan relief. All federal student loans that were taken out before June 30, 2022, qualify for debt cancellation – meaning you will not owe up to $10,000 of existing federal loans, and $20,000 if you received Pell Grants.

This is great news, I think. Let’s sift through the noise to determine if you are eligible, how much, how to apply, and what happens if my loan is forgiven?

Frequently Asked Questions Answers
What forms of student loans are included in Biden’s forgiveness plan? Federal student loans and Pell Grants
How much student debt is covered? $10,000 or $20,000 for Pell Grant recipients
Do I qualify? Yes, if your AGI is below $125,000 ($250,000, if Married Filing Jointly)
How to apply? Complete the application in October with form 1040 for the 2020 or 2021 tax years
How much will my student loan forgiveness tax be? $0.00 taxable to the IRS, but States may vary

How to Apply for the Student Loan Forgiveness Program?

Look at your personal federal income tax return, Form 1040, to determine your eligibility. Biden’s plan allows federal student loan borrowers to use their adjusted gross income (AGI) for tax years 2020 or 2021. If you have not filed income taxes for either or both tax years, NOW is the time to seek assistance. Since your AGI is the one factor that makes or breaks your chance at being $10,000 or $20,000 dollars richer (or debt free), seriously consider a professional tax preparer. It has never been more important to reap every tax benefit that is available because your income threshold cannot exceed $125,000 ($250,000 for married couples). The limit is not based on taxable income, which is usually much lower than your AGI due to below-the-line deductions and other tax credits.

File tax returns for 2020 and 2021, even if you had no filing requirement, because the Department of Education will use the returns to process your relief. A tax practitioner will make certain your AGI is correct and electronically file (e-file) the returns for immediate IRS receipt.

The application to apply for forgiveness will be available in early October. If you wish to be notified when the application is open, visit the US Department of Education’s mailing list page. It will take roughly 4-6 weeks for the federal government to process your student loan forgiveness application, so have your federal income taxes ready or you may end up with a payment come January. The administration confirmed the student loan payment pause ends December 31st, so borrowers will need to arrange for monthly payments on any existing loans come January.

What are the Tax Implications of Student Loan Debt Forgiveness?

Debt cancellation (such as forgiveness for those enrolled in an income-driven repayment plan) are generally treated as a taxable event, meaning the amount forgiven is treated as income that will be taxed. However, the IRS has confirmed student loans that are canceled through Biden’s plan will not be taxable, i.e., you will not add this to your income for federal tax purposes. Several states will charge income tax on the cancellation of debt, unless there is legislative action. These states currently are Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.

Many government benefits rely on your federal tax filings and standing with the IRS. Think all three stimulus payments, advanced child tax credits, and now student loans. Do not miss out on benefits you are entitled to because your IRS account and federal tax filings are too important to put on the back burner – tax professionals are ready to help. Contact the experts at Community Tax to see if you qualify for tax savings.


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