Student Loan Forgiveness – Tax Consequences
As many of you have probably heard, there was a plan announced in regards to forgiving student loan debt.
I have received many questions on how this will affect taxes going into next year and as your accountant I would like to answer those.
Will this trigger a tax event for my 2022 taxes?
The short answer is NO, this will not affect your federal taxes. The plan is to forgive up to $10,000 in student loans and up to $20,000 if you received Pell Grants. The American Rescue Plan made student loan forgiveness tax free until 2025. Normally, forgiveness of debt is a taxable event. For example, if you get relieved of $5,000 in credit card debt, that amount now becomes income in which you would pay taxes on.
With that being said, they have not given us guidance for your state tax return. Generally, states do adopt federal rules though.
2. How does student loan forgiveness affect the student loan interest deduction?
For the past two years, most borrows have not been able to use this deduction on their taxes. Normally, you could deduct up to $2,500 in interest depending on your income on actual amounts paid. If your student loans get completely forgiven you will no longer be able to take this deduction. If you still carry a balance after the forgiveness and they resume payments with interest, you will then be able to take the deduction.
I look forward to seeing all of you in the coming months. If you have any questions regarding your taxes, you are more than welcome to reach out to me at 440-299-1099. Additionally, please remember, my office has moved to the following address:
27540 Detroit Rd #101
Westlake, OH 44145