Were your student loans forgiven? Before you jump for joy, you need to understand that student loan forgiveness is taxable in most cases. Yep, just when you thought you were free from the clutches of the loan, it draws you right back in. However, this time it is only until after you file your taxes and then you are free.
Before we get into when you will be taxed, it is important to know that not every student loan forgiveness is taxable.
Which Student Loan Forgiveness Programs Are Taxable?
Non-taxable Programs Include:
- National Health Service Corps Loan Repayment
- Public Service Loan Forgiveness
- Law School Loan Repayment
- Teach Loan Forgiveness
Taxable Programs Include:
- Unpaid refunds
- Closed schools
- False certifications
- Death and disability
In addition, loan forgiveness under the income-based and income-contingent repayment plans after 25 years of repayment is considered taxable as well.
How is Debt Forgiveness Taxed?
Once you meet the requirements to have your loan forgiven, the amount is written off, and becomes taxable income on your tax return the same year it is written off. For example, if you had a loan amount of $20,000 written off and you made $40,000 after taxes at your job, your total taxable income on your tax return would be $60,000 for that year.
Instead of owing any more money on your loans, you will now owe money to the IRS and the bill can be quite hefty depending on the tax bracket you are in.
Preparing for Student Loan Forgiveness Taxes
Before you start to panic, there are some things that you can do to help you overcome the large tax payment that you may face.
- You should start by paying, at minimum, the interest on your student loans. When you have extra money, send it to your loan provider to start paying down the debt. If you are only making the minimum payment and you are not sending in extra money to cover the interest and additional payments, you could end up owing more than what you owe now in a few years.
- You must keep in mind that the higher your loan debts, the more money you will owe in taxes come tax time.
- Set a goal for yourself. You should take some time and research what tax bracket you want to be in. For example, if you make $15,000 and you want to fall within the same tax bracket, find out how much you need to pay off in student loan debt. You can also figure out how much you would need to pay to the IRS if you take the amount you owe and then add the amount of the loan that is to be written off.
- Avoiding default, late payments, and skipped payments can help keep the costs that you owe down. Once you fall into the battle of catching up your payments, you end up racking up fees for being late, additional notices, and the like.
- Consult your loan provider to find out what your options are as far as repayment plans, affordable payments, etc. Your loan provider wants to work with you, but you need to let them know you need help.
Dealing With the IRS
In the worst-case scenario, you will end up owing a lot of money to the IRS. There are some different measures you can take to ensure that you can pay the IRS and you do not have to deal with an angry Uncle Sam.
First, you can talk to the IRS about a lump sum payment. In this instance, you may be able to receive a discount if you pay the bill all at once. For example, if you owe $7,000, but you have $6,000 in hand, the IRS may accept that payment and call it even.
Next, you can talk to the IRS about making monthly payments to pay off your debt. In this case, the IRS will set up an affordable payment for you and you will be responsible for paying down the debt every month.
It is important that you grasp hold of the debt you have now and start minimizing it. If your loan is forgiven, you do NOT want to ignore the IRS as this can lead to bigger problems. If you know that you have a large student loan balance, start looking for ways to pay toward it.
Author: Jeff Gitlen
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