When the federal government cancels or the entire or a part of your student loan under some pre-specified circumstances, it is known as Student Loan Forgiveness. This kind of forgiveness is done through programs that are known as student loan forgiveness programs. It is given on performing some qualified services like voluntarily work, performing military tasks, some teaching in specific communities or any other services mentioned in the forgiveness forum.
It should be noted that are a number of jobs available to help get your loans forgiven. Having an in-depth understanding of the various student loan forgiveness jobs out there is crucial to see if your job can get your loans forgiven. Loan discharge and forgiveness are two different terms- discharges of loan is done in case of disability, fraud, death, bankruptcy, and more.
Loan Forgiveness Tax is the situation when the tax is charged on the loan which is forgiven by the government under any circumstances mentioned above. In general, the loans which are forgiven are tax-free rest depends upon the nature of the type of loan.
Table of Contents
- Taxability of Loan Forgiveness
- The darkside of Loan forgiveness
- Why expert advice?
- Possible changes in the future
Taxability of Loan Forgiveness
It is still a question for many, is loan forgiveness taxable or not? When the remainder of your loan is forgiven, this amount forgiven is treated as an income earned which is subjected to tax. Hence a borrower who gets their loan forgiven can expect a tax bomb at the end of the year.
The income which is generated from public service loan forgiveness, teachers loan, workers of peace corps, etc. are non taxable incomes but others like school fee loan refund, false certification etc. are all taxable income. On the part of repayment forgiveness plans, if the repayment is done in 25 years then the person is liable for paying tax.
In 2018, President Trump had made student loan discharge based on disability or death completely tax-free. Another is an exception to the tax issue i.e. insolvency.
It is an official document sent to individuals for the cancellation of their debt and mentioned as discharged or forgiven. After receiving this form, the person can enclose it with their income tax return to know their complete taxable income for that year. Mention it that time only so that you will not be charged with any late fee or the cancellation of the same thing.
Some steps to be considered if one has received the 1099-C form-
Verify the amount which appears in box 2, as it will be the amount of debt that will be discharged.
Consult with a tax professional so that he can guide you better and help you in getting benefits to the extent.
File your tax return and see what is the possible tax that is going to charge on your income.
Pay the tax bill according to the statement received by the government.
The dark side of Student Loan Forgiveness
After knowing the benefits that can be got from loan forgiveness, here is an exception to the situation which is explained below
Relationship between Insolvency in loan forgiveness and tax- “An Exception”
Form 1099C is issued when an individual gets their loan is forgiven, which indicates the amount that will be included in the income. But an insolvent is an exception to this clause. Insolvency is when the total assets are less than the total liability and the beholder is no longer able to pay their debts in the coming time.
For Example- John an Individual has $6,000 worth his car, $12,000 in retirement savings and a bank account with $8,000, so his assets total to $26,000. He also has $14,000 as debt of credit card, auto loan of $6,000 and $22,000 in student loans, so his total liabilities are $42,000. His current net worth is his assets ($26,000) minus his liabilities ($42,000), giving him a negative net worth of -$16,000.
Now that John is insolvent before but after the student loan of $26,000 got forgiven, then he is liable to pay tax on the income that is left, $6,000. But for any reason say his loan which he received as forgiven will be less than $16,000 then he will not be liable for any tax payment as he will be marked as insolvent before and after the finalization of accounts.
Why Expert Advice?
Being made aware about the insolvency clause with the loan forgiveness clause, one must be thinking of minimizing their income to make the least of tax liability on them. Not to falsify the net worth statement but to optimize and bring the real image in frame it is necessary to have an expert advice, also it helps in minimizing the tax on income.
The tax scenes are complicated and they are best handled by the experts in the field like the teacher can only teach her students, the students can’t do so. It’s better to consult an expert and pay them the fees rather than paying an excessive amount to someone because of the forgiveness you received.
Possible Changes in the future
Since 2016, it was made like few student loan forgiveness was allowed as being exempt from tax. Only those loans like PSLF, Teachers Loan, etc. are allowed for loan forgiveness on a clause that the borrower of that loan becomes permanently disable or due to death. Till date it is a kind of a dilemma that borrowers & lenders are in about the various norms regarding the same. But in the coming time it is going to change so as to assist them all in a better way.
In the meantime, it is important for all to get through it so that they can have a better understanding on how this whole mechanism works.
Worried about how you are gonna pay for college? Learn more about student loans.
The tax is levied on most of the loans which are forgiven but with the right handling of the prospects accounts without manipulating them in the wrong way. Under certain circumstances, the tax on loan which is forgiven is discharged completely from the part of the government and in specific from 2018 those who are completely disabled or death are not supposed to pay tax on forgiven loans. The repayment plans of loan forgiveness provide better relief to those who opt for it so as to minimize their interest for that duration and can avail good forgiveness in the future.