If Biden forgives student loans, would it be taxable?

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Q. If President Biden proceeds with student loan forgiveness, is that money taxable? If it is, it feels like a tax bomb is waiting on the other side of that forgiveness.

— Borrower

A. This is a great question.

And of course, it’s complicated.

Before 2021, federal student loan debt canceled by the government in some cases was considered taxable income, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

“If you had $10,000 in federal student loans and that was forgiven, you’d owe ordinary income taxes on the $10,000,” she said. “If you were in the 22% marginal tax bracket, you’d owe $2,200 on the forgiven debt.”

To make matters worse, this additional income could even bump you into a higher tax bracket, Kane said.

“While it was great to receive debt relief, these borrowers got your ‘tax bomb’ in owing taxes on the amount relieved,” she said.

In March 2021, the American Rescue Plan of 2021 had a provision that said that any student loans forgiven through the end of 2025 will not count as taxable income, Kane said. This is temporary and set to end unless extended or made permanent, she said.

“This won’t impact borrowers under certain income driven plans like those for public servants, teachers, or for the disabled as debt forgiveness is already not taxable,” she said. “The IRS and any passage of debt forgiveness legislation will need to clarify if debt relief applies to federal loans only or also to private student loans.”

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This story was originally published on June 8, 2022.

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