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Your Freelance Taxes May Increase with Student Loan Forgiveness Key Facts About Freelance Taxes and Student Debt Relief

The landscape of student loan forgiveness has undergone significant changes, and with it, the tax implications for borrowers have become a critical topic of discussion. As we move through 2024, understanding these implications is essential to ensure you understand the full impact of student debt relief on your freelance taxes, especially because the current federal exemption expires at the end of 2025. 

To understand where we are today in regard to the federal tax exemption on student debt relief, here is some background information: 

  • The American Rescue Plan Act went into effect in 2021, providing a temporary reprieve for those with student loan debt by exempting federal student loan forgiveness from taxation. 
  • To qualify for student loan debt cancellation, borrowers must have a 2020 or 2021 tax year income of less than $125,000 for individuals and less than $250,000 for married couples or heads of household. 
  • Loans must have been taken out before June 30, 2022, to qualify for student loan forgiveness.
  • For the purposes of student loan debt cancellation, income is calculated as the borrower's adjusted gross income (AGI), as opposed to gross or taxable income.
  • This exemption applies to most cases of federal student loan forgiveness.
  • However, not all states are following the lead of the federal government in the exemption of student debt relief from taxation. 
  • This means that you need to stay aware of the changes affecting student loan debt on your freelance taxes if this issue affects you. 
  • Federal Pell Grant recipients who meet the income requirements are eligible for $10,00 to $20,000 in student debt forgiveness, capped at the amount of the borrowers' outstanding debt.
  • You can pay down your loan balance to decrease your tax bill if you expect a loan discharge after 2025. However, if you do this, the government may assess that you have enough to pay off your loans and your payments will go up in the future, decreasing the effectiveness of the forgiveness program.
  • Overall, how much you will have to pay in taxes depends on the amount of loan forgiveness you receive and your tax bracket. 
  • The Department of Education (DOE) indicates that roughly eight million borrowers whose income is already on file at the department will have their loans automatically forgiven without having to apply.
  • Borrowers who do not have their income currently on file with the DOE have to apply through an online form. 

If a borrower fails to complete the application before the payment pause expires at year-end will still be able to get the relief.

Freelance taxes on student loan forgiveness may be affected at the state level. 

Despite the federal tax exemption, one of the critical items which may impact your freelance taxes in regard to student debt relief is whether your state is electing to tax the amount of your loan forgiveness, treating it as income. 

To date, a handful of states are imposing taxes on student loan forgiveness amounts: 

  • Indiana
  • Mississippi
  • North Carolina, and 
  • Wisconsin. 

If you live in one of these states, you should monitor your obligations. In addition other states have programs that offer alternatives or additions to federal tax relief.

For New York residents who are recent graduates and are participating in a federal income-driven repayment plan, the state offers  the “Get on Your Feet”  loan forgiveness program. To qualify you must:

  • Be a U.S. citizen or eligible noncitizen You must be a legal resident of New York State who has resided in New York State for 12 continuous months. 
  • Have graduated from a high school located in New York or received a GED.
  • Have graduated from a college or university located in New York.
  • Apply for the program within two years of receiving an undergraduate degree.
  • Work primarily in New York State, if employed.

How the end of the student debt relief tax exemption will impact specific loan programs.

As it stands now, once the tax exemption for student loans ends on December 31, 2025, how student loan forgiveness and discharge programs are taxed depends on the specific loan program. Here is a synopsis of the most common student loan programs and how they are treated for tax purposes:  

Public Service Loan Forgiveness (PSLF): This program applies to federal loan borrowers working for nonprofit organizations, government agencies, or public service groups if they are employed by a qualifying employer full-time for 10 years and make 120 qualifying monthly payments. Once these specifics are met employees can apply for debt cancellation and if approved, the government forgives the remainder of the federal loan balance which is then excluded from federal income taxes.

Income-Driven Repayment (IDR) Discharge: IDR plans are for federal loan borrowers who have trouble affording their payments under the standard 10-year repayment plan. IDR plans extend the loan terms and base the borrower's monthly payments on a percentage of their discretionary income. The four IDR plans are:

  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)
  • Pay As You Earn (PAYE)
  • Saving on a Valuable Education (SAVE; formerly known as Revised Pay As You Earn, or REPAYE)

The government will discharge the remainder if the borrower still has a balance at the end of their loan term. However, the forgiven loans are taxable as income at the federal and state levels.

Borrower Defense to Repayment Discharge

Borrower Defense to Repayment Discharge is a program that eliminates federal student loans belonging to borrowers who their college misled, or if their schools engaged in misconduct and violated state laws.

The IRS and the U.S. Department of the Treasury have issued notices that clarify that loans discharged through Borrower Defense to Repayment are not taxable as income.

Total and Permanent Disability Discharge (TPDD)

TPDD applies to borrowers who become totally and permanently disabled. The government will discharge the remaining loan balance for eligible federal loan borrowers. When you receive the loan will also impact how the forgiveness is taxed.  

If you received a discharge before January 1, 2018, the discharged loan amount is subject to federal income taxes. Loans discharged between January 1, 2028, and December 31, 2025, are exempt from federal income taxes. How TPDD will be taxed in 2026 and beyond is not clear at this time.

Tax on student loan forgiveness for private student loans

Private student loans aren't eligible for federal loan programs like PSLF or TPDD. However, borrowers with private student loans may qualify for other loan forgiveness or discharge programs. For example, some private lenders will discharge the loans of borrowers who become totally and permanently disabled.

The tax implications of student loan forgiveness on your freelance taxes may be significant, and there are still likely changes that will occur since the current federal government administration is pursuing different avenues to extend the tax exemption past the current December 31, 2025 deadline, such as the income-driven repayment program, Saving on a Valuable Education (SAVE) Plan. Through this initiative (which has not yet been approved) loan forgiveness may be possible after a set period of consistent payments.

To prepare yourself for the impact of any student debt relief you may receive this tax year, or if you anticipate receiving loan forgiveness, it is crucial to prepare ahead to avoid any surprise tax bills. This preparation includes understanding the tax laws in your state, anticipating any tax forms such as the 1099-C which you must file if you have $600 or more of canceled debt, and seeking professional advice if necessary. 

Jonathan Medows Jonathan Medows is a NYC-based CPA who specializes in taxes for consultants across the country. His website has a resource section with how-to articles and information for freelancers.

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