CBA Record January-February 2023

YOUNG L AWYERS S EC T I ON : BU I LD I NG BR I DGE S

preliminary injunction to block the plan until a full trial on the merits. The next day, the Administration filed an expe dited appeal to the United States Court of Appeals for the Fifth Circuit seeking to vacate the preliminary injunction. On November 14, 2022, the plan suf fered another setback. In Nebraska, et al. v. Biden, et al. , six Republican attorneys general sought a preliminary injunction by arguing the plan violated the separa tion of powers and Administrative Pro cedure Act. The U.S. District Court for the Eastern District of Missouri ruled in favor of the Administration, holding that the six states lacked standing. The states appealed to the U.S. Court of Appeals for the Eighth Circuit. The Eighth Cir cuit then reversed the U.S. District Court ruling, held that the six states had stand ing, and issued a nationwide preliminary injunction pending appeal to the U.S. Supreme Court. On December 1, 2022, the U.S. Supreme Court granted certiorari in the Nebraska case and scheduled oral argu ments for February 2023. Eleven days later, the Court granted certiorari in the

Brown case and scheduled oral argu ments for the same day in February 2023. Today, the plan is on hold until both the Brown and Nebraska cases are resolved. Income Tax Rules for Student Loan Forgiveness Assuming the plan survives the challenges in Brown and Nebraska , the key question is: if you qualify and receive loan forgive ness, then will Illinois tax you on that for given amount? Ultimately, the answer to this question depends on two sets of tax laws: (1) discharge of debt rules, and (2) state conformity rules. Discharge of Debt Rules Under the federal default rule, if a lender discharges a borrower’s debt, then the bor rower includes the discharged amount in gross income and pays tax on it at ordinary rates. When this happens, the taxpayer receives a Form 1099-C, Cancellation of Debt, from the lender, who also submits this form to the IRS and the relevant state’s department of revenue for matching pur poses. However, various exceptions apply to the federal default inclusion rule, the

reporting requirement, or both, including two related to student loan forgiveness. I.R.C. §108(a). The first exception is the Public Ser vice Loan Forgiveness (PSLF) program. To qualify, the borrower needs to work for a certain period of time in a certain profes sion and for a certain employer, such as a non-profit organization or federal, state, tribal, or local government. Additionally, the borrower must make a certain number of qualifying monthly repayments. If a borrower qualifies under the PSLF pro gram, then generally the forgiven amount is excluded from gross income and is not taxed by the IRS. I.R.C. §108(f )(1). The secondexception isPresidentBiden’s plan. To qualify under the plan, a borrower must have federal student loans and meet the applicable income requirement below. If a borrower qualifies under the plan and secures relief, then the forgiven amount is excluded from gross income, not taxed by the IRS, and not reported on a Form 1099-C. I.R.C. §108(f )(5); I.R.S. Notice 2022-1 (removing reporting requirement for Form 1099-C).

Biden Student Loan Forgiveness Plan Income Requirement

Tax Filing Status

2020 or 2021 Income (Based on AGI*)

Did not file taxes

Made less than the required income to file federal taxes

Single

Under $125,000

Married, filed taxes separately

Under $125,000

Married, filed taxes jointly

Under $250,000

Head of household

Under $250,000

Qualifying widow(er)

Under $250,000

* If you filed federal taxes, your income requirements are based on your adjusted gross income (AGI), found on line 11 of IRS Form 1040, U.S. Individual Income Tax Return.

CBA RECORD 35