Ask The California Employment Tax And Payroll Tax Attorney – Does A Cancelled Student Loan Generate Taxable Income? Are There Exceptions?

By Robert S. Schriebman

2022

Introduction

When you borrow money, the loan proceeds you receive do not constitute taxable income. When you repay the loan, you are not allowed a deduction for the payment of principle, but you may be allowed a deduction for the payment of interest.  A loan does not increase your net worth.  However, when a loan is wholly or partially cancelled, your net worth increases, and the loan cancellation will result in taxable income.  This has been the state of the law since 1931 when a corporation repurchased its own bonds for less than face value.  The US Supreme Court so ruled in US v. Kirby Limber Co., 284 US 1 (1931). On the other hand, if the loan is wholly or partially cancelled as a result of a gift or inheritance, this cancellation is not treated as taxable income. IRC § 102.

The American Rescue Plan Act of 2021

This act has modified the treatment of student loan forgiveness for discharges in 2021 through 2025 wherein a taxpayer may be able to exclude the repaid or cancelled loan amount.  When a student loan is wholly or partially cancelled, the usual rules of taxable income apply because the student’s or former student’s net worth increases by the amount of the cancelled indebtedness.

Exception to the Rule

On September 12, 2022, the IRS issued a short press release setting forth exceptions to the rule where there will be no realization or recognition of income.  The exceptions are as follows:

• A loan for postsecondary educational expenses.
• A private education loan.
• A loan from an educational organization described in Code § 170 (b)(1)(A)(ii).
• A loan from an organization exempt from tax under Code § 501(a) to refinance a student loan.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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