WASHINGTON, D.C. – In late December, Congress passed a bipartisan bill introduced by U.S. Senators Chris Coons (D-Del.), Angus King (I-Maine), and Rob Portman (R-Ohio) to eliminate a tax penalty on student loans that are forgiven due to death or permanent disability. President Trump signed the bill into law just before the new year.
While the federal government forgives certain federal student loans in the case of the death or disability of the borrower, the IRS treats this cancelled debt as income, which can result in tens of thousands of dollars in immediate tax liability. The Stop Taxing Death and Disability Act eliminates this unfair tax. The tax on discharged loans is not only an unnecessary tax, but it also prevents the Department of Education from streamlining the loan forgiveness process.
“I’m pleased that the bipartisan Stop Taxing Death and Disability Act was enacted into law. Taxing Americans who are grieving the death of a child or adjusting to a life-changing permanent disability is simply unconscionable,” said Senator Coons. “We forgive these student loans because that’s the right thing to do as a country. Requiring these Americans to pay a surprise tax on student loan forgiveness serves no public policy purpose whatsoever.”
The federal government authorizes the forgiveness of certain federal loans in the case of the death or total and permanent disability of the borrower.
Despite these provisions, individuals who suffer great personal loss or severe injury are often shocked to learn that the IRS requires them to pay income tax on the amount of student loans forgiven by the federal government and private lenders. A one-time discharge can result in tens of thousands of dollars in immediate tax liability.
The Stop Taxing Death and Disability Act: