What Biden’s Student Loan Forgiveness Means for Your Taxes

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Editor’s Note: This post has been updated to reflect that on March 11, 2021, President Biden signed the American bailout plan that makes all student loan forgiveness tax-free.

Since day one in office of President Joe Biden, federal student loan borrowers have been anxious to see if and when he will keep his election promise to cancel loans of $ 10,000 per borrower as part of his contingency action plan amid the ongoing pandemic.

Eliminating student loans would ease the financial burden that has long faced 42 million borrowers.

Below we explain where Biden’s student loan waiver currently stands and what impact this would have on borrowers’ taxes.

Where Biden’s Student Loan Granting currently stands

Biden’s $ 1.9 trillion US bailout plan unveiled in late January made no mention of student debt cancellation, nor did he reportedly include student debt cancellation in his latest draft budget from May 2021.

This is on the heels of his government, which said earlier this year it supports forgiveness.

In a February 4 tweet from White House press secretary Jen Psaki, she said, “The president continues to support the cancellation [sic] of student debt to relieve students and families. Our team is looking to see if there are any steps he can take through executive action and he would appreciate the opportunity to sign a bill that will be sent to him by Congress. “

In early April, President Biden asked the US Department of Education to consider whether its executive powers would allow him to enact massive student loan waivers without the approval of Congress.

Democratic lawmakers like Chuck Schumer and Elizabeth Warren have urged Biden to act quickly – and even increase forgiveness to $ 50,000 per borrower for a federal student loan. However, without a forgiveness included in his upcoming budget proposal, borrowers may not see any action or decisions any time soon.

What Biden’s student loan waiver would mean for borrowers’ taxes

While student debt cancellation is still unknown, it is important for borrowers to know beforehand the tax implications of loan approval.

In March 2021, Biden signed the American Rescue Plan, which included a provision that all student loan forgiveness was tax-free. In the past, however, the loan waiver would have meant a high tax burden.

“In general, when a debt, student loan, or other amount is canceled, the amount waived represents taxable income for the year it is amortized,” said Steven Rossman, CPA and shareholder at Drucker & Scaccetti, a tax advisory firm based in Philadelphia says Select.

Rossman helps us break down a hypothetical example to show how the $ 10,000 federal student loan waiver would traditionally have been taxed before Biden’s tax update.

As a federal student loan borrower, you will have $ 10,000 of your loans canceled in 2021. This means that $ 10,000 will be added to your taxable income under what is known as the Debt Cancellation (COD) income and you would be expected to receive a Form 1099-C for 2021 as documentation.

Then when you file your 2021 (April 2022) tax return, you will have $ 10,000 to report as cash on delivery income. For example, being in the 20% federal tax bracket will result in an additional $ 2,000 ($ 10,000 x 20%) tax due in April 2022 when taxes are filed for 2021. (Tax rates vary from person to person.)

“The good news is that the borrower doesn’t have to pay back $ 10,000, but the bad news is that they owe $ 2,000 in taxes,” says Rossman.

If the granting of student loans is tax-free

Before Biden entered into the American Rescue Plan, there were only certain exceptions to whether or not student loan remission could be taxed. Finaid.org says forgiveness can be excluded from taxable income if it is conditional on the borrower being in a specific profession, such as Public Service Lending (PSLF), for a specified period of time. You can find more exemptions from taxable forgiven debt on the IRS website.

Before Biden’s tax update, Rossman had speculated that the unprecedented circumstance of the pandemic may have resulted in student loan borrowers seeing additional exemptions introduced.

“As we saw from the Paycheck Protection Program (PPP) lending, the credits under the PPP are not taxable for entrepreneurs when the credits are used for eligible business expenses,” he says. “Perhaps this will set a precedent for the taxation of student loans that are made.”

So prepare now for a possible granting of student loans

Since we don’t yet know whether or not federal student loans will go out, plan ahead by making sure you are putting money aside regardless of the outcome.

One way is to put money in a high yield savings account that earns interest. The Varo Savings Account offers an above-average APY as well as two programs that automatically transfer money from your Varo bank account to your savings account: Save Your Pay, which transfers a percentage of your paycheck to your savings account, and Save Your Change. which rounds up your checking account transactions to the nearest dollar and transfers the difference to your savings.

If you set aside just $ 20 a week, you could go up to $ 1,000 in a year, which can come in handy when lending doesn’t come.

Bottom line

Student loan waiver in 2021 won’t increase your taxable income thanks to the latest American bailout plan that makes student loan waivers tax-free.

Keep an eye out as Congress negotiates additional coronavirus relief efforts in the coming months and start saving a little on every paycheck now so you will be ready if there is never any forgiveness.

Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.

source https://collegeeducationnewsllc.com/what-bidens-student-loan-forgiveness-means-for-your-taxes/