While forgiveness may do wonders for the soul, it can inadvertently lead to an adverse tax situation for the recipient.
And when the entity spreading their generosity is the U.S. government….well who could blame a taxpayer for being suspicious.
As a rule, the IRS considers any loan forgiveness by a creditor to be income to the debtor and taxable. If you owe a creditor (ex. Mortgage lender, credit card) and the lender “forgives” the debt (cancels your obligation to pay it back) the amount owed will be considered “income” to the debtor. Have a $100,000.00 mortgage loan forgiven? Then expect the IRS to consider you to have earned $100,000.00 in income and assess an income tax on that amount (in addition to your regular income).
This also applies to Student Loan Forgiveness but it’s not nearly as simple.
Whether the forgiveness of a student loan is taxable or not will depend on several factors, including the time in which the loan forgiveness was granted. Prior to December 31, 2025 most forgiven student loans were excluded from be treated as income. However, unless Congress acts to the contrary, student loans forgiven after January 1, 2026 will not be exempt and thus subject to IRS treating as taxable income.
Given that the average student loan debt forgiven is between $20,000.00 and $87,000.00 (depending on programs) the tax “bomb” that can hit an unsuspecting taxpayer is significant.
If applying for student loan forgiveness in 2026 the prudent taxpayer should plan and consult with their tax preparer before filing for the forgiveness.
If you have a tax issue with the IRS or New York State, the attorney at Beige Law, PLLC can help. Contact our office today and begin putting your tax issues behind you.