Students commit to work for KPMG for three years after graduation; otherwise, 100% of the tuition, fees, books, and stipend (including taxes paid) must be paid back to KPMG. If the student is required to repay the amounts paid by KPMG for their education, the student may be able to deduct the repayment under the claim – of – right d is another example of how employers are attracting talented employees while also assisting with the cost to educate these individuals.
Employees who recognized income as a result of the employer’s paying their student loan debt and who in a later year are required to repay all or a portion of the student loan payment to the employer, may be able to take a deduction under the claim – of – right dount repaid in the year of repayment. 21
If an employee fails to meet contractual obligations under an employer’s student loan repayment assistance program, he or she may be required to repay a portion, or all, of the benefit received, depending upon the requirements of the program
If the amount of repayment is less than $3,000, for employees the deduction would be a miscellaneous itemized deduction subject to the 2%- of – adjusted – gross – income floor. 22 It is important to note that miscellaneous itemized deductions subject to the 2% floor are not available for tax years beginning after . However, under Sec. 1341, relief is available for certain repayments over $3,000. 23 Employees who itemize their deductions and made repayments during the tax year that meet the Sec. 1341 requirements can deduct the amount repaid as an “other itemized deduction” on line 16 of Schedule A (Form 1040), Itemized Deductions, or take a credit in the amount of the decrease in tax that would have resulted if the repayment amount had not been included in the employee’s income. 24
Prior to the COVID – 19 pandemic, the Brookings Institution projected that based on current trends in student loan defaults, nearly 40% of all borrowers who started college in 2003-2004 would default on their student loans by 2023. 25 Borrowers who default may have their wages garnished, income tax refunds taken, and credit ratings reduced, further increasing the financial insecurity of the borrower.
If individuals are upset about having to report taxable income as a result of canceled debt, it is worth emphasizing to them that they are still better off than they would be if the loan had not been discharged
In some situations, a borrower may be eligible to have student debt discharged. Typically, the amount of debt discharged is taxable income to the borrower. For instance, while a single individual with $50,000 of taxable income and $70,000 of additional income from debt forgiveness may be pushed into the 24% tax bracket and face an additional tax liability of $16,800, they are still much better off financially because they avoided paying back $70,000 of debt and interest, resulting in an after – tax cash flow of $53,200. 26
If certain requirements are met, however, the discharged debt is not taxable income. As discussed below, it may be possible to exclude a discharge of student debt from income in cases where, for instance, the borrower enters an underserved profession, the college or school has closed down, or the borrower is insolvent or permanently and totally disabled. Also, in certain relatively rare situations, student debt can be discharged in bankruptcy.
A taxpayer generally recognizes income equal to the portion of debt that is canceled. 27 However, Sec. 108 allows a taxpayer to exclude a discharge of debt from gross income in certain cases. 28 In particular, the discharge of all or part of a student loan is excluded from gross income if, pursuant to a provision in the loan, it was discharged as a result of the borrower’s working for a period of time in certain professions for any of a broad class of employers. 29 payday loans ND In order to encourage participation in public service activities, for instance, many educational organizations sponsor programs that offer students an opportunity to have their student loan debt discharged by working for a period of time in a public service organization.