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Student Loan Forgiveness and Taxes: What You Should Know

September 13, 2022

President Biden recently announced up to $20,000 in student loan relief for over 20 million borrowers…how do taxes factor in? We explore here.

Attention borrowers…are you up to speed on the recently announced student loan forgiveness? It is poised to impact over 20 million people. Wondering how taxes fit into the mix? What about state taxes? We have the details here.

Who qualifies for the forgiveness?

The relief is available to federal student loan borrowers who make less than $125,000 adjusted gross income (AGI) per year (or $250,000 married filing jointly).

How much will borrowers receive?

If you received a Pell Grant—you are eligible to up to $20,000 in loan forgiveness. Regular borrowers will receive up to $10,000 in forgiveness.

Private loan borrowers are not eligible for forgiveness.

All loans need to be originated by July 1, 2022.

What action do borrowers need to take?

Eligible borrowers will generally need to fill out a form with the Department of Education indicating their financial information. If your information is up to date with the Department of Education, you won’t need to fill out the form.

How will taxes factor in?

Eligible borrowers will not owe federal taxes on the forgiven amount, but state taxes may be due.

Income from the discharge of student loans could be excluded from Massachusetts general income. Why? Massachusetts, for personal income tax purposes, typically follows the provisions of the Internal Revenue Code (IRC) in place as of January 1, 2005. TIR 22-2 states they are updating their conformance to the current code (not as of 1/1/05) with respect to IRC §108. Massachusetts follows Code § 108(f)(5) as in effect under the current Code.

Hence, Massachusetts adopts ARPA’s changes to Code § 108(f)(5), and therefore could exclude student loans from MA general income.

Does the loan interest deduction still apply?

Borrowers are typically able to deduct up to $2,500 in loan interest payments if they make up to $85,000 per year ($175,000 for married filing jointly). You will not be able to deduct interest for this amount if you receive loan forgiveness.

Student loan payments will resume January 1, 2023, so any loan forgiveness will occur before this.

Questions? Contact us.

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