If you owe money and either the lender forgives your debt or someone else pays your debt, usually the result is taxable income to you. The tax law calls this concept “income from discharge of debt.” An example of this in today’s economic climate would be your mortgage loan being forgiven in the case of a short sale.
Although a discharge of debt generally results in income, the income from cancellation of certain student loans is excluded from gross income when the debt discharge is under a loan provision requiring the student to work for a certain period of time in certain professions.
The IRS reviewed a state-sponsored program enabling healthcare professionals who agreed to work in underserved areas to have all or part of their student loans forgiven. The IRS concluded that the loan forgiveness, or any payments to the healthcare workers that were used to repay the student loans, did not result in taxable income. The payments also are not subject to withholding, employment taxes or other reporting requirements.
The IRS analyzed the tax consequences of payments made to participants who were in similar programs but were not required to either have outstanding educational loans or use the payments to discharge or repay any such loans. The IRS concluded that these payments reflected employment incentives or compensation and were taxable to the recipients.
Unsure whether your student loan forgiveness is taxable, call the IRS Angel at 516 683-1313 for your answer.