Three States Will Tax Your Student Loan Forgiveness, And The Penalty Could Be Up To $1,100
Despite a federal tax exemption for student debt forgiveness some residents may receive a surprise cost come tax time.
At the end of August, President Joe Biden officially announced his student debt relief program — a plan that will cancel up to $10,000 in student loan debt per borrower, and up to $20,000 for those with Pell Grants, with income limitations. The move, which followed months of speculation and multiple extensions of the pandemic payment pause, will wipe out debt completely for millions of borrowers. But there are still some lingering questions: how will people apply for debt forgiveness? Are certain loans — like FFEL loans — eligible for forgiveness as well?
One question centers around whether forgiven student loan debt would be taxable. While it’s not going to be taxed at the federal level, state tax law can occasionally be very different than federal tax law, and at least a dozen states seemed primed to tax forgiven student loan debt. This is despite the fact that Senator Chuck Schumer added a provision to the American Rescue exempting student loan cancellation from federal tax laws until 2025.
According to the Tax Foundation’s reporting in late August, at the time of Biden’s debt cancellation announcement, 13 states had laws on the books that would require student loan debt forgiveness to be considered taxable income. The amount varies per state, but data from the Tax Foundation estimates borrowers could be on the hook to pay anywhere from $300 to $1,100 or more come tax time. While some states are sure to alter their laws to exempt student loans from taxable income, others will not.
Now, according to Axios, three states have confirmed they will still tax student loan forgiveness, and more are likely to follow. Indiana, Mississippi, and North Carolina have so far stated they will tax forgiven debt.
There have been a few states that have confirmed they will not consider the student loan forgiveness to be taxable. Residents who live in New York, Hawaii, Idaho, Kentucky, Pennsylvania, and Virginia will not be required to pay taxes on their student debt cancellation cancellation, per Bloomberg.
Some states are still undecided as to whether they will levy income tax. That includes Arkansas, Minnesota, Wisconsin, and West Virginia, though reporting has suggested that Arkansas, Minnesota and Wisconsin are likely to decide to tax forgiven debt.
There is still time for states to change their current tax provisions to help residents avoid a surprise tax bill related to their student loan forgiveness. “Of the states which still have the potential to tax student loan debt forgiveness, it is entirely possible that more may act administratively or legislatively before tax returns are due,” the Tax Foundation explained in late August.