I had some private student loans that I defaulted on a few years back. I've been paying on them for five or six years at this point, and I got some letters in the mail saying that that the bank has decided not to pursue the amount remaining because the statute of limitations has ended. I'm happy to not owe $15,000 anymore, but I'm curious if I'm going to get a 1099 in the mail and be taxed at the end of the year on the $15,000 as if I somehow earned this money?
Based on the information you provided, the $15,000 being forgiven will be taxable. Since you received the letters from the lending institution, I am assuming you are no longer making monthly payments. Therefore, you will receive a 1099-C for this debt forgiveness. It will be subject to federal tax. The amount of the tax will depend on your tax rate for 2018. An example is as follows: Assume you are in the 12 percent tax bracket for 2018. The $15,000 will cost you approximately $1,800. If you cannot pay the tax when filing the return, you should contact the IRS and arrange for a payment plan.
While it creates a tax burden, you are still saving a little over $13,000 in my example.
You did not say how long you had been paying your student loans. It’s important to note that student loan recipients who had been paying them for a 20 to 25 year period, may qualify for a debt forgiveness program. This is a separate process.
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Answered by: Carlo J. Silvesti, CPA, is an assistant professor of accounting at Gwynedd Mercy University in Gwynedd Valley, Pa.