Democratic presidential hopeful Elizabeth Warren's plan to forgive student loan debt has been making headlines the past few months. The Tax Warriors wanted to dive in to see what tax implications could be lurking amidst the plan.
What's the plan?
Cancellation of $50,000 in student loan debt for every person with household income under $100,000.
The $50,000 cancellation amount phases out by $1 for every $3 in income above $100,000, completely phasing out at household income above $250,000.
Federal student loan debt - cancellation will take place automatically using data already available to the federal government about income and outstanding student loan debt.
Private student loan debt - is also eligible for cancellation, and the federal government will work with borrowers and the holders of this debt to provide relief.
Cancellation of Debt
Many may not know cancellation of debt is typically treated as taxable income. If you borrow money and are legally obligated to repay at a future date, you have debt. If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled (and includable in income) in the amount you need not pay. (If the cancellation is with a family member and there is donative intent, the amount of the forgiveness is a taxable gift. But here we are only focused on student loans with unrelated third parties.)
So, will 45 million Americans in student loan debt be picking up $50,000 of income? Apparently not. Senator Warren and her team have come out to say that the canceled debt will not be taxed as income. This new type of student loan forgiveness would join the ranks of other exceptions to cancellation of debt income, which already include certain qualified student loans that are canceled if you work for a certain period of time in certain professions.
If this all sounds too good to be true and you are wondering what's the catch, get ready. Senator Warren proposes that she will more than pay for this debt forgiveness by implementing what she coins as the "Ultra-Millionaire Tax." This tax is a wealth tax that would impact approximately 75,000 households, as follows:
2% annual tax on household net worth between $50 million and $1 billion
1% annual tax on household net worth above $1 billion (3% tax overall)
All assets are included in the net worth calculation, including residences, closely held businesses, assets held in trust, retirement assets, assets held by minor children and personal property with a value of $50,000 or more.
Tax Warriors Perspective
Implementing the Ultra-Millionaire tax will be difficult to administer. Each year, the taxpayer and/or the IRS will need to calculate how much all of the taxpayer’s assets are worth. Valuation of closely held businesses and real estate can be time consuming and arduous. The IRS already has rules to assess the value of many assets for estate tax purposes but would likely need much more manpower to enforce and audit yearly valuations for 75,000 households.
As tax geeks, whenever we hear about new proposed legislation, we like to get to the nitty gritty of its tax impact. Senator Warren, as president or not, will have an uphill battle getting this bill through both houses. What do you think about this idea? We’d like to hear your views.