27 Jan Freelancers with Discharged Student Loans May Be Eligible for Tax Relief
Do you have a student loan that was recently discharged? If so, you may be eligible for tax relief on the value of the forgiven funds based on new guidance issued by the Internal Revenue Service (IRS). Read on to see if you qualify for these tax savings.
Typically, the discharge of a federal or private student loan that is used to finance attendance at a nonprofit or for-profit school is treated as a taxable event. This is because the cancellation of debt is generally treated as income to the debtor by the IRS. This requirement has recently been lifted by the IRS for certain situations meaning that affected students will not have to report the amount of the discharged loan or pay tax on the income. This tax break applies to students who:
- Were involved in a Closed School discharge process which allows the Department of Education to discharge a federal student loan obtained by a student (or their parent) who attended a school at the time it closed or who withdrew from the school just before it closed.
- Participated in the Defense to Repayment discharge process. This process enables the Department of Education to discharge a Federal Direct Loan obtained by a student (or their parent) if the borrower can provide proof that a school’s actions or omission would give rise to a cause of action against the school under applicable state law.
- Are part of legal settlement discharge actions. This generally corresponds with lawsuits brought by federal and state governmental agencies to resolve allegations of unlawful business practices by educational institutions and specific private lenders such as unfair, deceptive and abusive acts and practices.
The IRS is also extending this tax relief is to any creditor that would be required to file information returns and provide statements to any affected students. The IRS is strongly recommending that creditors do not provide students (nor the IRS) with a Cancellation of Debt form (Form 1099-C).
This new tax guidance on discharged student loans comes just in time for tax season. Since the guidance is effective for loans discharged in 2016 and later, if you are eligible for this tax relief you may also be eligible to claim refunds for overpayment of tax on any previous year’s return. If you are uncertain about your status under this new IRS regulation, check with a tax professional as you prepare to file your 2019 taxes.