1. Do I have to pay taxes on forgiven interest amount too (FICA,State,Federal)?
No. Absolutely not. You are not and can not be taxed on that money which you did not actually receive.
2. Is there any sort of deductions I can take out of it (my AGI for the past few years were more than 80k)?
If you were not enrolled as a full time student for any one semester that started in the tax year for which the W-2 is issued, then there are no deductions you can take against it for education.
3. My employer says that taxes would be around 8k on that loan. I asked the employer to withdraw only FICA taxes and that I'll pay Federal and State (IL) when I file my taxes on March 2021. Are there any re-precautions to that? I heard that I might incur penalties for not paying W2 taxes on time when they go through my paycheck.
Yes, possibly. If at tax filing time you owe the IRS more than $1000 or more than 10% of your total tax liability (whichever is *HIGHER*) then you will be fined and penalized for not having enough taxes withheld by your employer from each of your paychecks.
Finally, I suggest you seek legal advice on this. Your employer and contribute a maximum of $5,150 to your education costs each tax year, and that amount *DOES NOT* have to be reported on any of *YOUR* tax returns. The employer does not include it in box 1 of *ANY* W-2. However, any amount over $5,150 the employer is *required* to include it in box 1 of your W-2.
I question this because you refer to it as a "loan" when I see it as either an employer contribution to your education, or compensation paid to you in return for the labor or services you provided that employer. If the employer has "suddenly" decided to "forgive" this loan and now wants to treat it as compensation, I smell something fishy. For one thing, if your estimated tax on the amount to be "forgiven" is $8K, then I'm quite confident it's going to be enough to put you in the next higher tax bracket. Something stinks here, and it's not in your favor.
