0

The USA is offering a limited student loan debt cancellation to certain borrowers. The IRS classifies cancelled debt as income for the purposes of income tax, so anyone who takes advantage of this debt cancellation will have to increase their taxable income for the year in which the cancellation is applied. While some taxpayers may be surprised by this, it's really quite mundane from an personal-income-tax standpoint.

My question comes from the fact that some media outlets have cast doubt on the legitimacy of this debt cancellation program. In fact, while I cannot find the source, I saw a particular media outlet quote someone who said a future president could potentially reinstate the debt that was cancelled under the current administration. For the purposes of this hypothetical, let's assume exactly that happens (i.e. ignore whether this is possible or not, and ignore any potential actions by either the judicial or legislative branches)...

Person A has $10,000 of his debt cancelled under the current administration's program in 2022. They add $10,000 to their taxable income as cancelled debt for their 2022 income taxes.

In 2025, a different administration is sworn in and they undo this program, adding $10,000 back on to Person A's debt.

Would this just mean Person A would have a $10,000 deduction for their 2025 income taxes? Is there any precedent or parallel for such an action that might grant some guidance on how the IRS would contend with uncancelled debt?

2
  • 1
    I'd say this is impossible to answer. Assuming a future administration does have the power to reinstate the debts, then they would, presumably, also have the power to decide what the tax effects would be.
    – TripeHound
    Commented Oct 19, 2022 at 12:07
  • It is unlikely that any administration would be able to "reinstate" a canceled debt. There's a lawsuit against the current administration regarding the legality of this program, but if the administration prevails and the debt is canceled I don't see how it would be possible to "uncancel" it. That would be considered a new tax, and given that it would be a head tax - it wouldn't be constitutional for the Federal government to collect it.
    – littleadv
    Commented Oct 19, 2022 at 16:22

1 Answer 1

1

The IRS classifies cancelled debt as income for the purposes of income tax, so anyone who takes advantage of this debt cancellation will have to increase their taxable income for the year in which the cancellation is applied.

The IRS has said, and the Biden administration has said, and congress has said, that the forgiveness of the student debt isn't a taxable event as long as it happens before the end of 2025.

Most states have matched the Federal tax law in this regard. Though the list of states is changing as some will be looking at making modifications to their current tax law.

In 2025, a different administration is sworn in and they undo this program, adding $10,000 back on to Person A's debt.

Would this just mean Person A would have a $10,000 deduction for their 2025 income taxes? Is there any precedent or parallel for such an action that might grant some guidance on how the IRS would contend with uncancelled debt?

In this scenario the IRS would do nothing because the debt forgiveness wasn't taxable.

The question is what would the state do? It could depend on the timing, because all the states should have a version of the 1040-x

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .