Student Loan Borrowers Beware: You May Have to Pay State Tax on Canceled Debt Even If You Don’t Receive an IRS Form 1099-C – Financial Services

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As reported late last year, the IRS announced in Notice 2022-1 (Notice) that lenders are not required and should not issue IRS Forms 1099-C when certain student loan debt are cancelled. The notice followed changes made to Section 108 of the Internal Revenue Code (Code) by the American Rescue Plan Act of 2021, which expanded the types of student loan debt discharges (forgiveness) that will be excluded from income. The Biden-Harris administration’s student debt relief plan further expands the types of student loans that will be forgiven.

For your information, when a lender files an IRS Form 1099-C with the IRS (and provides a copy to the borrower), they notify the IRS and the borrower of the amount of debt forgiven. In addition to informing the borrower of the amount of forgiven debt, IRS Form 1099-C reminds the borrower that tax may be due on the forgiven debt.

Although student loan debt forgiveness may be excluded from income for federal income tax purposes, some states do not exclude such debt forgiveness from income for state income tax purposes. . This means the borrower may have to pay state income tax on the canceled student loan debt.

If the IRS and the borrower do not receive an IRS Form 1099-C from a lender when a debt is canceled, they do not have a verified statement of the canceled amount.

Student borrowers who have obtained debt forgiveness need to know if their state will enforce debt forgiveness. If so, they should receive a clear statement from the lender of the amount of debt forgiven. This amount may need to be added back to their adjusted gross income reported on their IRS tax return to determine their taxable income in the state.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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