Don’t Let The IRS Drop This Tax Bomb On You

If you’re one of the more than 13 million student loan borrowers (including parent PLUS loans) no one needs to tell you about the pain of those monthly payments.

If you’ve had an on-time payment records and are nearing the 25-year mark, you may be considering applying for Student Loan Forgiveness. In a nutshell, the remaining debt is forgiven (written off) and you are no longer shackled to those monthly payments.

(Note: this does not include the student loan forgiveness programs proposed by 2020 presidential candidates. This post discusses current available loan forgiveness programs).

Sounds great, right?

Not so fast. Be sure to consider the tax consequences of this program. Suppose you have $60,000 in student debt remaining to be paid and your Student Loan Forgiveness application is approved.

The IRS will issue you a 1099C form, Cancellation of Debt. You will owe taxes on the forgiven amount. Finance writers have taken to calling it the “tax bomb” because it could increase your tax bill by tens of thousands of dollars. Like millions of student loan borrowers, this could come as an unwelcome hit to your financial plans.

Steps for paying off this unexpected tax bill include paying it off in full at tax time, or requesting a payment plan from the IRS. You will need to stick to that plan with no missed payments, or the IRS can come calling for he full amount due along with penalties and fines.

Exceptions

However, you may be able to dodge this tax bomb if any of the following apply to you:

Lastly, if you can prove insolvency to the IRS, you may be off the hook for some or all of the tax bill. You’ll need to prove that the tax bill will create a substantial financial hardship for you.

In any case, it pays to weigh all of your options when considering filing for one of the Student Loan Forgiveness programs. While you could be saving up to hundreds of dollars each month, you may be hit with the infamous “tax bomb.”

Before making any decision that could impact your tax status, always check with a licensed professional such as a CPA or tax preparer. They will help you assess your options and to determine if you should file for one of the student loan forgiveness programs.

While the prospect of freeing yourself from student debt after all these years is enticing, consider every option before moving forward. You don’t want that tax bomb to fall on you unexpectedly.

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