Need help with the tax bill after your student loan was forgiven?
For most people, obtaining a university degree today comes at a much heftier price tag than it did only twenty years ago. Forbes reported that student loan debt in the U.S. has reached a mind-boggling figure of $1.56 trillion in 2020, making it the second-highest consumer debt category, right after mortgage debt. Here is an overview of the national student loan debt overview in the first quarter of 2020:
|$1.56 trillion||Amount of student loan debt outstanding|
|44.7 million||Number of borrowers with a student loan debt|
|54%||Percent of college attendees taking on debt to pay for their education|
|$32,731||Average amount of student loan debt per borrower|
|10.8%||Amount of student debt that's at least 90 days past due or in default|
If you’re among the 45 million Americans saddled by a student loan, managing your debt responsibly needs to be at the forefront of your financial planning. Some of that burden may be relieved if you qualify for one of the student loan forgiveness programs. There is, however, a catch—the settled or forgiven amount that was your outstanding loan balance will suddenly qualify as taxable income. This means you can expect a potentially large tax bill in your mail, somewhat infamously dubbed as the “student loan forgiveness tax bomb”.
Will student loan forgiveness increase your tax bill?
Whether you’ll have to pay tax on the amount of your student loan that was dismissed or not hinges on the type of student loan repayment plan you’re on. It’s important to note that loan forgiveness applies only to federal student loans, as opposed to private loans that offer no such option.
Student loan forgiveness on an income-driven repayment plan
If you’re on an income-driven repayment plan, the probable answer is yes. On this plan, you are allowed to make payments towards your student loan based on your monthly income for 20 or 25 years, after which the remaining debt is forgiven. That forgiven amount turns into taxable income, which can result in a sudden and heavy tax burden. To get an idea of how much you’ll be expected to pay in tax, use the Repayment Estimator tool to evaluate how much of your loan will eventually be forgiven.
Student loan forgiveness if you work for a qualifying employer
One notable exception is the Public Service Loan Forgiveness (PSLF) program, which you can apply for if you work full time for a qualifying employer (U.S. federal, state, local, or tribal government or not-for-profit organization). After you make 120 qualifying payments, your remaining debt is forgiven, and you don’t need to pay any taxes on the forgiven amount. Similarly, you will not be taxed on your forgiven student loan debt if you are enrolled in the National Health Service Corps Loan Repayment Program or the Teacher Loan Forgiveness plan.
Student loan forgiveness related to other reasons
In the case of total and permanent disability, you will qualify for a federal student loan discharge. Loans can also be discharged free of tax charges if your school defrauded you or shut down during your enrolment, for example.
What are some of the most commonplace mistakes when filing a tax refund?
When preparing your tax return, make sure you avoid the common mistakes as listed below. Errors such as these can hold up the processing, which could lead to delays in issuing your potential tax refund. It is for this reason that the IRS advises doing your taxes electronically. The error rate for paper returns is 21%, as opposed to only 0.5% for electronic returns. That means a paper return is 42 times more likely to contain errors! When you file electronically, you will be assisted by their proprietary software that calculates the math correctly, detects mistakes, and prompts the user to fill out any missing information on the form.
Most frequent errors when preparing a tax return include:
- Misspelled names or inaccurate Social Security numbers
- Incorrect filing status
- Math mistakes
- Incorrect bank account numbers
- Unsigned forms
- Figuring credits or deductions
- Filing with an expired individual tax identification number
Misspelled names or inaccurate Social Security numbers
Does the name on your tax return exactly match the name on your Social Security Card? Similarly, your SSN should be exactly the same as it appears on your Social Security Card, so double-check that these two pieces of information are absolutely accurate.
Incorrect filing status
If you’re not sure what your filing status is, the IRS’ Interactive Tax Assistant will help you select the correct one (especially if more than one filing status applies).
Errors with complex calculations on a paper return are fairly common, so it’s best you file electronically and let the software do the math for you. If you’re adamant about filing manually, double-check your math and consider asking a tax consultant to help you with the paperwork.
Incorrect bank account numbers
It’s important you provide the correct bank account numbers—if you’re entitled to a tax refund, you want your money to be able to find its way to you, right?
An unsigned tax form simply isn’t valid. In the case of a joint return, both spouses must sign the document.
Figuring credits or deductions
Wading through all the available IRS credits and deductions is often too confusing for most people. Get the Interactive Tax Assistant to determine it correctly for you or engage a tax consultant to help you.
Filing with an expired individual tax identification number
The IRS doesn’t allow any exemptions or credits to your tax return if you’ve used an expired individual tax identification number (ITIN). You’ll receive a notice from the IRS to renew your ITIN. After you complete this, the IRS will be able to process your return.
Pay the tax bill with your credit card
There are several ways you can pay your tax bill, but the most common options include your bank account (DirectPay) without a fee and your debit or credit card for a small fee. If you decide to pay by credit card, you will incur a fee that’s a percentage of your tax payment.
Expect that rate to be between 1.87% and 1.99%, with the minimum cost between $2.50 and $2.69, depending on the payment processor. A good solution could be a new credit card that offers 0% APR for a limited amount of time, as long as you can pay off the debt within the promotional period.
The bottom line is, try to avoid paying with your credit card unless you’re absolutely certain you can pay it off in time to avoid interest charges. Burying yourself into debt and damaging your credit score is a scenario that should be avoided at all costs.
What happens if you can’t pay your taxes right away?
The IRS offers various payment plans and installment agreements for those individuals that are struggling to pay their tax bills in one go. You may be eligible to apply online for a long-term payment plan if you owe $50,000 or less in combined tax, penalties, and interest, and have filed the necessary returns.
Similarly, if you owe less than $100,000 in combined tax, penalties, and interest, you may be eligible for a short-term payment plan. It’s worth noting that IRS payment plans come with attached fees and interest, which can fluctuate and change every three months. You should go down this route only if you absolutely must.
Facing a tax lien
Continuous avoidance to pay your taxes can have dire and long-reaching consequences, starting with a tax lien. A tax lien is a document on public record that says the government is putting a claim on your property. This doesn’t mean they will automatically seize the property, only that they have the right to it before other creditors (including the bank).
The lien will include the amount of your tax debt, plus any additional costs, potential penalties, and interests. Bear in mind that the tax lien can negatively reflect on many aspects of your life: it can restrict your plans to travel abroad, hamper your prospects of finding a new job, and prevent you from getting credit. In addition, the tax lien will apply not only to the assets you owed when it came into effect but also to everything you acquired after the lien was put into place. You will not be able to get rid of the tax lien until you pay the outstanding debt—unless a statute of limitations comes in first.
The final measure: a tax levy
If the tax lien hasn’t yielded the payment of overdue taxes on your part, the IRS will send several warning letters before they escalate the lien into a tax levy. A tax levy entails a legal seizure mechanism that takes away your property in order to cover the debt you incurred.
A tax levy can consist of a variety of penalties, such as wage garnishment (requiring your employer to withhold an amount of your salary to satisfy the debt), or seizing your assets and freezing your bank accounts. The IRS can also seize your passport, pension, investments, and social security. They have rarely gone after people’s homes (it’s considered bad publicity), but that measure is certainly within their power.
The items that cannot be seized illegally include unemployment benefits, annuity and pension benefits, workers’ compensation, child support payments, and disability payments.
Work out a solution
The only way you can keep your situation from escalating further is by cooperating and communicating with the IRS. You may be eligible to apply for a settlement request called an OIC (offer in compromise), or you can work out a payment plan that will allow you to start paying off the debt. Another option is to file for bankruptcy, but be aware that it’s usually a long and convoluted process that doesn’t automatically guarantee you’ll be freed of your tax debt.
Asking for an extension date for your tax bill
Due to the coronavirus pandemic, the Trump administration has pushed the income tax filing deadline from April 15 to July 15 2020, as announced in late March 2020 by the Treasury Secretary Steven Mnuchin. If, however, you need even more time to prepare your taxes, you should apply for an extension of the time to file with the IRS. Keep in mind that the extension of time to file your return doesn’t mean you will have more time to pay your taxes—you still need to honor the payment deadline or face penalties as a consequence. (You may be exempt from this if you are a member of the Military serving in the Armed Forces in a combat zone or a contingency operation). You can file your tax extension for free by filling Form 4868 using the IRS Free File program electronically, or you can print it, fill it out, and send it by post.
You can request extension dates for various bills with DoNotPay
When it comes to requesting an extension for any type of payment, DoNotPay is a fantastic resource that automates and streamlines the entire process for you. Go to our app and, on the homepage, select the Corona Relief option by clicking on “Get protected”. Our AI-powered chatbot will take you through the process and pen an extension date request on your behalf in a few minutes.
You can ask for penalty relief with the IRS in some selected cases
The IRS states that you may qualify for relief from penalties (which are essentially late fee charges) if you’ve made an effort to comply with the legal requirements but haven’t been able to meet your tax obligations due to circumstances beyond your control.
In general, you can apply for penalty relief if you fall under one of the three categories:
|Reasonable Cause||Applies in cases of natural disasters, inability to obtain records, death, serious illness or incapacitation|
|Administrative Waiver and First Time Penalty Abatement||Applies when:
1. You didn’t previously have to file a return, or you have no penalties for the three tax years prior to the tax year in which you received a penalty.
2. You filed all currently required returns or filed an extension of time to file.
3. You have paid, or arranged to pay, any tax due.
|Statutory Exception||Applies if you received incorrect written advice from the IRS|
DoNotPay can generate a fee waiver request for you
Generally speaking, if you are struggling to pay your bills and have missed one or several payments, you ought to immediately apply for a late fee waiver. Many companies are opting to temporarily dismiss late payment charges due to the unprecedented economic crisis caused by COVID-19. Depending on the company or service you’re requesting to waive your fee, it can be done through:
- Website e-form
- Phone call
- In-person visit
- Lawyer request
DoNotPay offers an alternative way to submit a fee waiver request, and it’s by far the simplest and quickest solution out there. When times are tough, why not let our app save you some easy cash through an automated, AI-fueled process? On DoNotPay’s homepage, select the Corona Relief option, and our chatbot will guide you through the required steps. It’s incredibly easy, you’ll see.
Let DoNotPay assist you with your bills
DoNotPay can dispute different charges, appeal fines, request fee waivers and extension dates for you, and so much more—in essence, it’s the perfect tech sidekick to have in your life. Request assistance with your bills by following these straightforward steps:
- Log in to the app through your web browser
- Scroll down and select the Corona Relief option by clicking on “Get protected”
- Let us know what you need help with
- Choose whether you would like to waive your late fee or extend your payment due date
- Answer to a few questions our chatbot will ask you
As for the questions we need to know in order to help you, it’s all essential information regarding:
- Your name
- Your residential address
- Your email address
- The reason why you’re struggling to pay your bills
Once it collects the required information from you, DoNotPay will generate a solution to your request in just a few minutes.
How else can DoNotPay help you?
Tagged as the world’s first “robot lawyer” DoNotPay has a lot of great options that can assist you in your day-to-day life:
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You can get DoNotPay by signing up for free on your web browser.