Were Your Student Loans Forgiven? You May Owe State Taxes This Year - CNET

If you received student loan forgiveness or any student debt cancellation last year, you may have received an additional tax form this year: 1099-C. 

This story is part of Taxes 2024, CNET's coverage of the best tax software, tax tips and everything else you need to file your return and track your refund.

This tax form details any canceled debt, which can come with tax implications. You need to report any debt write-offs when you file your taxes, just like wages or self-employment income, said Mark Steber, senior vice president and chief tax information officer at Jackson Hewitt Tax Service. 

And with the current White House administration forgiving student loans for nearly 153,000 borrowers last month, it's important to know your tax liability for forgiven debt. 

The good news is, most people who received student loan forgiveness -- whether through the public service loan forgiveness program, income-driven repayment forgiveness or another program -- won't have to pay federal taxes on that forgiven amount this year or next year, thanks to a provision tucked into the $1.9 trillion American Rescue Act COVID relief package. 

"Qualifying student loans discharged between December 31, 2020, and January 1, 2026, are not included in federal taxable income," said Lisa Wood, director of tax for Buckingham Advisors. 

But if you live in a state that imposes income tax against forgiven debt, you may be on the hook for state and local taxes. Here's what you need to know to file your taxes correctly this year.

What is the IRS 1099-C form?

If you received debt cancelation or forgiveness in 2023, you may receive a 1099-C tax form. The 1099-C form is sent by lenders or issuers to borrowers with at least $600 of canceled debt. In addition to student loan forgiveness, you may receive the form if a portion of your mortgage was forgiven or you have an unpaid medical or credit card debt.

The form includes: 

Your name, tax identification number and physical address  The creditor's name, TIN and address  The account number for the debt  Debt description  Amount of debt canceled, plus the amount of interest  Date of cancellation  Whether or not the creditor is personally liable for repaying the debt Market value of the property (if applicable

Forgiven debt, such as mortgages and credit card balances, are usually taxable and straightforward. While student loan debt is typically taxable, forgiven federal student loans are currently not subject to federal income tax., Steber said. 

What the 1099-C means for student loan forgiveness

Even if your forgiven loan balance is not taxable, you should still receive a 1099-C form. 

"Any student loan forgiveness may trigger a 1099-C whether the forgiveness is taxable or not," said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. And it's still best to include it when you file your taxes. But for the majority of Americans, the canceled debt is likely not taxable income. 

The federal exclusion is a temporary provision. And if it's not extended, some student loan forgiveness under certain programs will be taxable starting in 2026, Wood added. 

If you live in these states, you may owe taxes on forgiven student loan debt

Forgiven federal student loans may be exempt from taxation for the next two years, but that may not be the case for your state taxes. Arkansas, Indiana, Mississippi, North Carolina and Wisconsin do not conform with the federal tax exemption and will tax forgiven student loans as income. (Note, certain programs like the PSLF may be excluded from taxation in certain states.)

If your student loans were forgiven and you have questions about your tax liability, it's best to consult with a tax professional. This will keep you out of harm's way with the IRS, said Steber. A tax professional can make sure the cancellation of debt is filed correctly and make sure you don't pay more in taxes than you have to, he added. 

What to do if you don't receive a 1099-C

If you have debt that was canceled, but don't have a 1099-C, it's best to consult with a tax professional. Typically, you'll receive a 1099-C from the lender or issuer if at least $600 was canceled or forgiven. But if you're missing one, it's better to know your tax responsibility to be on the safe side. 

"Sometimes issuers are required to send 1099-C forms and don't. And sometimes they're not required to, but do so anyway," said Steber. "Just because you didn't get a document doesn't absolve you of tax responsibility," he added. Whether you have a 1099-C or not, it's still best to bring any supporting debt cancellation documents to your tax preparer, such as any letters from the lender. 

When it comes to student loan forgiveness, if you don't have a 1099-C, it's likely that the lender is still trying to collect the debt, said Luscombe. Therefore, you won't get a 1099-C. If you have documentation that the debt should be marked as forgiven, contact the loan administrator and include any supporting documents. "This could result in the receipt of a 1099-C or a revised 1099-C," he added. Then, you may need to include an explanation that your student loan debt forgiveness is not taxable with the tax return. 

What if your 1099-C shows an incorrect amount?

If there's an error on the form, Wood suggests immediately contacting the creditor who issued the form to explain the discrepancy. Be sure to provide proof. Then, ask the issuer to file a corrected Form 1099-C with the IRS and send a copy, she added. 

But if you're already in the process of filing your taxes, Luscombe recommends that you include the same amount on the 1099-C and explain why the amount may differ from what's reported on the 1099-C in your tax return. 

For more tax information, including tax filing deadlines, how to file your taxes for free and the latest on the child tax credit check out CNET's Tax Tips.