The above is a very good question. A recent article in Strategic Finance magazine discussed how most loan forgiveness creates a taxable event. The government considers the forgiveness of a loan as income to the person who is having the loan forgiven. Let’s put this into dollars and cents.
Assume George has a student loan of $70,000, and for some reason, that loan is forgiven. In many, if not most, situations, the lending institution is required to report that forgiveness to the IRS as income. George should receive a 1099-C notifying him of the transaction. If George (who is single) normally has taxable income of $25,000, his normal income tax for the year is going to be $2,803 using the 2020 tax tables. If his $70,000 loan is forgiven, he will have been kicked into the highest Federal tax bracket and his tax for the year will be $16,880. And if you live in a state with an income tax, there would surely be a bill from them, as well.
Now don’t get me wrong here. I’d much rather pay about $14,000 in extra taxes than pay off $70,000 of a loan. But if you are not ready to pay off that extra $14,000, you could be in a real bind. I’ve heard many times that the last entity you want as a creditor is the IRS.
I know that in the current election season, we’re hearing a lot of promises about paying off student loans. Not being a political analyst, I’m not going to speculate on what is going to happen. It is possible that if there is forgiveness, Congress could make the transaction non-taxable. All I’m saying here is that things could happen, and you should be ready.
If there is forgiveness, be sure and discuss it with your tax advisor. Along with advice, be sure and thank God for His graciousness in getting you out of some payments. If there is not forgiveness, thank God anyway for His provision to make the payments as they come due.
And remember that the best way to get through college is without debt. With God’s help and some wise actions, it is possible. See my book, “Say No! To College Debt.”
#CollegeDebt, #CollegeLoans, #Borrowing, #SayNoToCollegeDebt, #LoanForgiveness, #1099-C
Source: Chiang, B. & Curatola, A. Forgiven student loans: Taxable or tax-exempt?. Strategic Finance. August 2020.