Tom Talks Taxes - August 25, 2022
Straight talk about the tax issues related to student loan forgiveness
Yesterday, President Biden announced executive action to provide student loan forgiveness for specific borrowers. Is this a bad policy? Is this a good policy? Will this cause inflation? Will the courts invalidate it? Is it fair?
All good questions — none of which I plan to address. Let’s focus on the tax issues.
The tax consequences of any student loan forgiveness are crystal clear, thanks to the American Rescue Plan Act. Here is what I posted on Twitter in March 2021:
§108(f)(5) states that student loans forgiven after December 31, 2020, and before January 1, 2026, are excluded from an individual’s gross income.
Additionally, Notice 2022-01 instructs lenders not to issue Form 1099-C, Cancellation of Debt, to report student loan forgiveness under §108(f)(5).
Yesterday, the Department of Education issued a press release with an overview of the executive action. Here is the section on income thresholds:
Now let’s get to the issue that has generated rampant speculation: how will the federal government determine an individual’s income? Gross income or adjusted gross income? What tax year? Is the tax return filing status controlling? We have no definite answers, and that’s the truth.
I think the following are prudent steps to take for clients on extension:
There is no reason to delay filing if a taxpayer is clearly under these thresholds on a separate or joint return.
There is no reason to delay filing if a taxpayer is clearly over these thresholds on a separate or joint return. This assumes no tax planning opportunities (i.e., retirement contributions) to change this outcome.
Delay filing until guidance is issued if a taxpayer has tax planning opportunities (i.e., retirement contributions) to get below the threshold, and the taxpayer only wants to undertake these opportunities if it secures student loan forgiveness.
Delay filing until guidance is issued if a taxpayer is over the joint threshold but under the individual threshold on a separate return. If filing cannot be delayed, file separate returns, as a joint election can be made later on an amended return filed within three years of the unextended due date. A joint return generally cannot be undone after the unextended due date of the return.
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