If your student loan was cancelled, the amount of the debt that was forgiven could be reported as taxable income and impact the amount of tax that you owe at the end of the year. However, there is an exception. If you filled out a loan provision requiring that you work at a certain job for a pre-determined amount of time, you can discount your forgiven student loan debt from your taxable income. Below is more information on the tax implications for cancellation of student debt.
Qualifying for the Exception
If you meet the criteria above and wish to exclude the forgiven debt from taxable income, you will only qualify if your loan was made by one of the following 3 parties.
1) a local or state government, the Federal government, or a subdivision of one of them.
2) a school with a program funded by one of the governments above and inspires students to work in under-privileged areas or underserved occupations.
3) a tax-exempt public benefit corporation which governs a municipal, county or state hospital where workers are regarded as public employees.
Filing for the Exclusion
On Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (as well as Section 1082 Basis Adjustment), check the proper box under line 1 to indicate the correct type of discharge of indebtedness. Then, on line 2, write in the amount of discharged debt excluded from your gross income. The rest of your forgiven debt then needs to be counted as taxable income.
Tax Implications for Cancellation of Student Debt
If none of the criteria above fit your situation, then you will have to report all of your cancelled student debt as taxable income on your annual return. More taxable income means more taxes owed. You may also be pushed into a higher tax bracket. It would be wise to budget for this additional expense ahead of time. Fortunately, these tax implications for cancellation of student debt only apply to the particular year in which your debt was absolved. Keep in mind that these guidelines apply to federal taxes. You may still be responsible for state taxes for that forgiven debt. Consult with an accountant for more specific information and guidance on this topic. This information is meant purely as an overview and should not be taken as legal or accounting advice.