If you had your student loans forgiven last year, you might owe state taxes. You might have received a tax form called 1099-C, which shows any cancelled debt. It’s important to report this when you file your taxes, just like any other income.
Around 153,000 borrowers had their student loans forgiven recently. The good news is, that most won’t owe federal taxes on this forgiven amount until 2026. This is because of a provision in the $1.9 trillion American Rescue Act COVID relief package.
Lisa Wood, the director of tax for Buckingham Advisors, explains that student loans discharged between December 31, 2020, and January 1, 2026, won’t be included in federal taxable income.
However, some states tax cancelled debt as income. This means if you live in one of those states, you might still owe state and local taxes. So, it’s crucial to understand your state’s rules when filing your taxes this year.
Form 1099-C: Everything you need to know
If you had debt forgiven in 2023, you might receive a 1099-C form from your lender or issuer. This form reports canceled debt of $600 or more. You might get one for forgiven student loans, mortgage debt, or even unpaid medical or credit card bills.
The 1099-C form contains details like:
- Your and the creditor’s information (name, address, tax ID)
- The account number and a description of the debt
- The amount of debt canceled, including any interest
- The date of cancellation
- Whether you were personally liable for the debt
- Market value of the property (if applicable)
Generally, forgiven debt like mortgages and credit card balances are considered taxable income. However, there are exceptions, such as forgiven federal student loans which are currently not taxed.
Understanding the Tax Implications of Student Loan Forgiveness
Some people might receive a 1099-C form even if their forgiven loan balance isn’t taxable. This form is important for tax filing purposes, regardless. According to Mark Luscombe from Wolters Kluwer Tax & Accounting, any student loan forgiveness can trigger a 1099-C, whether taxable or not. Including this information in your tax filing is still recommended. But for most Americans, the forgiven debt likely won’t count as taxable income.
The federal exclusion for student loan forgiveness is temporary. If not extended, certain forgiveness programs could become taxable starting in 2026, as mentioned by Wood.
Living in certain states might also affect your tax liability for forgiven student loan debt. While federal forgiveness may not be taxed for the next two years, states like Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin don’t follow this exemption and will tax forgiven student loans as income. However, some programs like the Public Service Loan Forgiveness (PSLF) may still be excluded from taxation in certain states.
If you’re uncertain about your tax obligations regarding forgiven student loans, it’s wise to consult with a tax professional. According to Steber, this ensures you navigate IRS requirements correctly and avoid overpaying taxes. A tax professional can guide you through properly filing the cancellation of debt and ensure you only pay what’s necessary.
What to Do if You Haven’t Received a Form 1099-C
If you haven’t received a 1099-C for canceled debt, it’s important to take action to understand your tax obligations. Normally, you’d get this form if at least $600 of debt was forgiven, but not receiving it doesn’t mean you’re off the hook for taxes. You should speak with a tax professional to ensure you handle the situation correctly.
According to experts, sometimes lenders are supposed to send out 1099-C forms but forget to do so. Other times, they might send them even if they’re not required. Either way, not getting the form doesn’t mean you’re exempt from paying taxes. Whether you have the form or not, it’s wise to provide any related documents, like letters from the lender, to your tax preparer for guidance.
In the case of student loan forgiveness, if you haven’t received a 1099-C, it could mean the lender is still attempting to collect the debt, so they haven’t issued the form yet. If you believe your debt should be forgiven, you should contact the loan administrator and provide any supporting documents. This might lead to receiving a 1099-C or a revised one later on. Then, you might need to explain to the IRS that your forgiven student loan debt isn’t taxable when you file your taxes.
Dealing with an Incorrect Form 1099-C
If you find an error on your Form 1099-C, it’s crucial to act quickly. Reach out to the creditor who issued the form and explain the mistake, providing any evidence you have. Ask them to correct the error by filing a new Form 1099-C with the IRS and sending you a copy.
However, if you’re already in the process of filing your taxes, include the same amount on your tax return as shown on the 1099-C. Alongside, clarify why the reported amount might differ from what’s on the form.
Remember, prompt communication and documentation are key when addressing discrepancies in tax forms. By taking these steps, you can ensure accuracy in your tax reporting and avoid potential issues with the IRS.
Bottom Line
Understanding how taxes work with forgiven student loans can feel complex. But remember, most borrowers won’t owe federal taxes on forgiven amounts until 2026. However, some states might still tax this as income.
If you received a 1099-C form, include it with your tax filing even if the amount seems non-taxable. Consult a tax professional if you’re unsure or need help navigating the process.
Remember, even if you don’t receive a 1099-C, you might still be responsible for taxes. Discuss this with a tax professional to ensure you meet your tax obligations correctly.
Student Loan Forgiveness Frequently Asked Questions (FAQs)
Question: What are the types of student loans in the US?
Answer: Student loans in the US come in two main types: federal student loans and private student loans. Federal loans are provided by the government, while private loans are offered by banks, credit unions, and other private lenders.
Question: How does student loan forgiveness work?
Answer: Student loan forgiveness is a process where some or all of your student loan debt is forgiven, meaning you no longer have to repay it. This can happen through various programs and criteria set by the government or specific organizations.
Question: Who qualifies for student loan forgiveness?
Answer: Qualification for student loan forgiveness depends on the specific forgiveness program you’re applying for. Generally, eligibility criteria include working in certain public service professions, making consistent payments for a specified period under income-driven repayment plans, or meeting other specific requirements.
Question: What are the different types of student loan forgiveness programs?
Answer: There are several types of student loan forgiveness programs, including Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, Income-Driven Repayment Plan Forgiveness, and forgiveness for borrowers with disabilities or attending closed schools.
Question: How to apply for student loan forgiveness?
Answer: To apply for student loan forgiveness, you typically need to submit an application form along with supporting documentation to the loan servicer or the forgiveness program administrator.
Question: Is student loan forgiveness taxable?
Answer: In most cases, student loan forgiveness is not taxable. However, there are exceptions, particularly for certain types of forgiveness programs or if you are enrolled in an income-driven repayment plan and have a remaining balance forgiven after a set period.
Question: How to apply for federal student loans in the US?
Answer: To apply for federal student loans in the US, you need to complete the Free Application for Federal Student Aid (FAFSA) online. This form determines your eligibility for federal financial aid, including grants, work-study, and loans.
Question: What are the current student loan interest rates in the US?
Answer: The current student loan interest rates in the US depend on the type of loan and when it was disbursed. Federal student loan interest rates are set by Congress each year, while private loan rates are determined by individual lenders.
Question: How does the US government manage student loans?
Answer: The US government manages federal student loans through the Department of Education, which sets policies, disburses funds, and contracts with loan servicers to handle billing and repayment.
Question: What factors does a student loan calculator consider?
Answer: A student loan calculator considers factors such as the loan amount, interest rate, loan term, and repayment plan to estimate monthly payments and total repayment amounts.
Question: How to use a student loan payment calculator?
Answer: To use a student loan payment calculator, input the required information such as loan amount, interest rate, loan term, and repayment plan, then the calculator will generate estimated monthly payments and total repayment amounts.
Question: What information is needed to use a student loan payment calculator?
Answer: You’ll need to provide details such as the loan amount, interest rate, loan term (in years or months), and type of repayment plan (standard, income-driven, etc.) to use a student loan payment calculator effectively.
Question: Can a student loan payment calculator help me save money?
Answer: Yes, a student loan payment calculator can help you save money by allowing you to compare different repayment plans and understand how making extra payments or refinancing could impact your total repayment amount.
Question: Do I need to include Form 1099-C on my tax return?
Answer: Yes, if you receive Form 1099-C for canceled debt, you generally need to report it on your tax return, even if the canceled debt is not taxable.
Question: Is the amount on a 1099-C tax form considered taxable income?
Answer: The amount on a 1099-C tax form may be considered taxable income depending on various factors such as the reason for cancellation and any applicable exemptions or exclusions.
Question: Do I need to file both Form 1099-MISC and Schedule C?
Answer: If you receive income reported on Form 1099-MISC as self-employment income, you typically need to report it on Schedule C of your tax return if you’re operating as a sole proprietorship or a single-member LLC.
Question: What is Form 1099 Copy C?
Answer: Form 1099 Copy C is a copy of Form 1099 sent to the recipient, which reports various types of income received during the tax year, such as interest, dividends, or canceled debt. It serves as a record for the taxpayer to use when filing their tax return.