13 States Ready to Tax Student Loan Forgiveness

By Stacy M. Brown, NNPA Newswire Senior National Correspondent

According an analysis by the Tax Foundationup to 13 states will consider President Joe Biden’s student loan forgiveness a taxable event, levying up to $1,100 in taxes on certain borrowers who receive a $10,000 forgiveness.

When announcing plans to forgive up to $20,000 in student loans, Biden said the provisions of the U.S. bailout would make the canceled debt tax-free.

However, the law does not exempt loan forgiveness at the state level.

“As a general rule, a discharge of debt counts as income and is taxable,” wrote Jared Walczak for the Tax Foundation.

“Under the American Rescue Plan Act (ARPA), however, cancellation of student loan debt between 2021 and 2025 does not count as federal taxable income. States that follow the federal treatment here will also exclude debt cancellation from their own income tax bases.

“But, for various reasons, not all states do this. There are at least six relevant interactions with the Internal Revenue Code (IRC) for the purpose of processing student loan debt forgiveness.

Those who receive $10,000 in loan forgiveness now face the following tax penalties in the following states:

  • Arkansas: $550
  • Hawaii: $1,100
  • Idaho: $600
  • Kentucky: $500
  • Massachusetts: $500
  • Minnesota: $985
  • Mississippi: $500
  • New York: $685
  • Pennsylvania: $307
  • South Carolina: $700
  • Virginia: $575
  • West Virginia: $650
  • Wisconsin: $530

Walczak said those amounts double for people receiving $20,000 in debt relief.

He noted that in several other states, tax authorities have indicated there will be no student debt discharge tax despite the ambiguity of state law.

“California, for example, does not comply with a post-ARPA version of the IRC but has a provision in existing law exempting canceled student loans under income-contingent repayment programs,” Walczak wrote.

“Legislation expressly conforming to the new federal law has failed, but state tax authorities appear to be taking the position that the pardon announced by the Biden administration will be covered under existing law.”

Similarly, Walczak noted that officials in Pennsylvania announced that the Biden administration’s cancellation of student loan debt is not taxable.

In the weeks and months to come, Walczak added that it’s likely other states will issue guidelines on the treatment of discharged student loan debt and perhaps even enact legislative fixes, which would narrow this list. .

While the debt – if retained – would have been paid over a period of years, the forgiveness of the debt is included in income in the year it is taxed.

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