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The IRS may not impose tax on discharged student loans

| Jan 21, 2020 | Internal Revenue Service

Not every college experience works out as Boston residents plan. Any number of things can happen that cause a individual not to complete a degree program at a certain institution. In some cases, any student loans taken out could be discharged by the Department of Education and the IRS may not require the student to count it as taxable income.

If a school’s actions would reasonably result in litigation, then the DOE may discharge the loans of the student. If a school closed while during a student’s attendance or the student left shortly prior to the closing, his or her student loans could be discharged. If the Commonwealth of Massachusetts or the federal government filed a suit against the school for a variety of reasons, the student’s loans may be discharged under a settlement. If the school or a private student loan lender made misrepresentations or fraudulent claims, the income from a discharge may not be taxable as well.

Ordinarily, discharged loans create a taxable event, but not necessarily in the cases above. In any of those instances, it is possible that the IRS will not require the student to claim the discharged loans on his or her tax returns. The trick is determining whether a student’s discharged loans fall under one of the exclusions.

A Boston college student may feel relieved that he or she will not be responsible for paying back student loans. However, that feeling could be short-lived when it comes tax time. In order to determine whether the discharge created a taxable event as far as the IRS is concerned, it would be wise to consult with a tax attorney prior to the student filing his or her federal income tax return.

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