Information Returns not Required for Tax-exempt Student Loan Discharges

Taxpayers whose student loans were discharged in 2021 generally won't be receiving a payee statement to report the discharge. The IRS has directed lenders to not file Form 1099-C or furnish payee statements to report the discharge of student loans in 2021 through 2025 that are excluded from gross income under Code Sec. 108(f)(5).

Loan Discharges Are Generally Taxable

Unless an exception or exclusion applies, a taxpayer must include in gross income debt that a lender discharges, forgives, or cancels. A borrower generally must report the entire amount of the outstanding debt as income if the debt is cancelled without the payment of any additional consideration. Any interest that was owed on the cancelled debt must also be reported as gross income unless the interest would have been deductible.

However, in some cases discharged debt is not considered income. For example, discharged debt is not income if:

• the debt is discharged in bankruptcy;
• the taxpayer is insolvent when the debt is discharged;
• the debt is qualified principal residence debt discharged before January 1, 2026;
• the debt is qualified farm debt or qualified real property business debt; or
• the debt is for a student loan the is discharged under certain conditions.

Certain Student Loan Debt Discharges Exempt from Tax

For years before 2021, the discharge or all or part of a student loan is excluded from gross income if:

• the student loan is discharged in 2018, 2019, or 2020 due to student’s death or total and permanent disability;
• the student loan is cancelled or discharged in any tax year provided the student works for a specified period in certain professions for a broad class of employers; or
• the student receives repayments or forgiveness of student loans as a participant in certain public health programs or due to certain school closures.

A student loan for this purpose generally is any loan to an individual to assist him or her in attending an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Also, the loan must have made by a qualified lender.

American Rescue Plan Act Extends Student Loan Discharge Exemption

Under the American Rescue Plan Act, an individual may exclude from gross income the amount of qualified student loans cancelled or discharged in 2021 through 2025. Qualified student loans include loans for post-secondary education provided by the government or educational institution, private education loans, and original and certain refinanced loans from tax-exempt organizations with a public service requirement. The exclusion does not apply to private education loans or loans from tax-exempt organizations if the discharge is on account of services provided to the lending organization.

Information Returns not Required

Generally, a lender that discharges at least $600 of a borrower's debt must file a Form 1099-C, Cancellation of Debt, with the IRS and furnish a payee statement to the borrower. Form 1099-C usually must be filed regardless of whether the debtor is required to report the debt as income.

In this case, the IRS believes that filing of an information return for student loan discharges that are exempt from income could result in the issuance of an underreporter notice to the borrower through the IRS Automated Underreporter program. The IRS is also concerned that furnishing a payee statement to the borrower with a tax-exempt discharge of debt could cause confusion. Therefore, the IRS has directed lenders to not file the Form 1099-C or furnish payee statements to report the tax-exempt discharge of student loans in 2021 through 2025.