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Accountants: Student debt "relief"


Ricordo
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So far  no one I've heard has approached this angle. I might be wrong but only a good accountant can tell. I'm not an accountant.

Whenever a financial institution "forgives" a certain outstanding debt (over $600.00?), the financial institution notifies the IRS that that certain amount was forgiven. The practical consequence is that the financial institution can now declare that certain amount as a loss on their tax return.

However, for the person whose debt was forgiven, that certain amount now classifies as income, and must be declared as income on his/her tax return.

If that is so, now imagine someone with a $50,000.00 outstanding student debt forgiven come tax return time. That'll be $50,000.00 additional income on his/her tax return.

Only Congress can change that rule. It cannot be changed by executive action. What Congress giveth, only Congress can taketh away.

Any accountant here that can confirm or deny this angle?

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1 hour ago, Ricordo said:

So far  no one I've heard has approached this angle. I might be wrong but only a good accountant can tell. I'm not an accountant.

Whenever a financial institution "forgives" a certain outstanding debt (over $600.00?), the financial institution notifies the IRS that that certain amount was forgiven. The practical consequence is that the financial institution can now declare that certain amount as a loss on their tax return.

However, for the person whose debt was forgiven, that certain amount now classifies as income, and must be declared as income on his/her tax return.

If that is so, now imagine someone with a $50,000.00 outstanding student debt forgiven come tax return time. That'll be $50,000.00 additional income on his/her tax return.

Only Congress can change that rule. It cannot be changed by executive action. What Congress giveth, only Congress can taketh away.

Any accountant here that can confirm or deny this angle?

Wow. If that's true the IRS would need thousands of new agents to collect the taxes due...

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This CNET article has a few interesting tidbits.

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For example, if you make $50,000 and have $20,000 in student loans forgiven, your taxable income would increase to $70,000, pushing you into a higher tax bracket.

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However, a provision tucked into the $1.9 trillion COVID relief package passed in March 2021 eliminates taxation on forgiven student loan debt through 2025. This means you won't owe any additional taxes on your forgiven student loans. 

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You're eligible for...(additional tax credits and deductions.)  .... if you paid student loan interest in the given tax year and if you meet modified adjusted gross income requirements

 

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If eligible, this deduction will lower your taxable income, which could reduce how much you owe the IRS or increase your tax refund. You might even get placed in a lower tax bracket, which could qualify you for other deductions and credits .

https://www.cnet.com/personal-finance/taxes/your-student-loans-were-forgiven-but-will-you-have-to-pay-taxes-on-them/

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