First, you should know that there are two types of student loan forgiveness: partial and complete.
With partial forgiveness, your client’s monthly payment is reduced, but they’ll still have to pay off some of the loans. With complete forgiveness, the entire loan is wiped away.
There are a few ways your client can qualify for student loan forgiveness. The most common way is through public service.
If your client works for a government or non-profit organization, they may be eligible for the Public Service Loan Forgiveness Program.
Under this program, your client can have their loans forgiven after 10 years of making payments.
President Joe Biden announced a proposal to forgive up to $20,000 of student loan debt on August 24, 2022, for everyone who has borrowed money from the federal government to cover educational costs. Around 20 million Americans’ student loan debt would be eliminated under the plan.
The federal student loan repayment moratorium has also been delayed until December 31, 2022.
Your clients might ask what they must do to qualify for this debt relief. This article discusses the requirements for loan forgiveness, the tax implications of debt cancellation, and where you can find the best tax pro software.
Who Qualifies for Student Loan Forgiveness?
A borrower may be qualified for up to $10,000 in student loan forgiveness if their annual income is under $125,000 (or $250,000 if they are married). Additionally, Pell Grant recipients may be eligible for an additional $10,000 loan forgiveness benefits.
What Actions Have To Be Taken By My Client To Get Relief?
Many will be left out of the automatic repayment of college debts. The U.S. Department of Education need not take further action if they can access your consumers’ most recent income information.
After that, they will have to complete an application (this will become available in October 2022).
Users can register on the DoE website if they want to be informed when the application is available.
Should my clients be taxed when their federal student debts are forgiven?
Between 2021 and 2025, the American Rescue Plan exempts student loan debt relief from federal income tax.
The federal strategy will be used by the majority of states as well. A few governments may still impose taxes on student loan forgiveness, though. The concerned states are Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
These states still have time to modify or maintain the present tax laws governing student loan forgiveness. This section will be updated as new information becomes available.
How Is Debt Forgiveness Taxed?
The general rule that canceled debt is taxed as regular income is subject to some exceptions, such as student loan forgiveness.
Other exclusions include using professional tax preparation software to report canceled debt, insolvency, bankruptcy, non-recourse loans, purchase price reductions, some farm debts, insolvency, company debt when the payment would have been deducted, and insolvency.
The lender must complete Form 1099-C with the canceled amount and mail it to your customer if your client’s debt has been forgiven.
You must submit Form 982 together with your client’s tax return if the canceled debt is not taxable income.
The tax form you’ll use if you’re claiming it as income depends on the type of debt it relates to.
As an example:
- Make use of Form 1040 or Form 1040-NR if you are not a business.
- Non-agricultural sole proprietorships must utilize Schedule C (Form 1040).
- Schedule E should be utilized for non-farm real estate rentals (Form 1040).
- Use Form 4835 for agricultural rents.
- Incorporate agriculture into Schedule F (Form 1040).
Conclusion
Many different student loan forgiveness and cancellation programs are available, and it can be difficult to keep track of all the changes and updates. It’s vital to stay up-to-date on the latest information to give your clients the best possible advice.
The most important thing to remember is that these programs are constantly changing, so staying informed is important. Keep an eye on the latest news and updates so that you can keep your clients informed as well. Lastly, you may use professional tax preparation software to help you streamline your processes.
With Keystone Tax Solutions, get the best tax pro software available to improve your service further! To simplify your processes, use our all-inclusive package. Try out the demo right away!
