People who benefit from the plan — up to $10,000 in loan forgiveness for those making under $125,000 annually and up to $20,000 for Pell Grant recipients — could find themselves facing a state tax bill of up to $1,100 if the state in which they live fails to designate forgiven student debt as non-taxable income.
According to an analysis from Tax Foundation, student borrowers in several states could see additional taxes — to the tune of $300-1,100 — unless their states take specific action to change the tax code before the end of the year.
Typically, discharged debt is considered income both for federal and state tax purposes — but a special provision built into to President Biden’s American Rescue Plan Act (ARPA) carves out forgiven student debt as an exception on federal tax filings. However, a number of states have not yet opted to conform to that provision — meaning that borrowers in those states could still be required to pay taxes on the forgiven amount as if they had earned it.
And while the amount borrowers could potentially be taxed is only a fraction of what the forgiven debt might have been, the loan would have been paid off over time in smaller payments and the tax bill will be due in full on April 15. Additionally, a jump in annual income of $10,000-$20,000 could result in some student borrowers landing in higher tax brackets — thus possibly facing a higher tax rate for the remainder of their income as well.
The states in which student borrowers are likely to face taxation on their forgiven loans are as follows: Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin.
Student loan borrowers in 5 states could be forced to pay $500-$1K in taxes on forgiven loans, says a new analysis.
The Tax Foundation says while Biden’s loan forgiveness is not federally taxable, it may still be counted as taxable income under state laws in AR, MN, MS, NC, WI. pic.twitter.com/NDSNJowr0U
— AJ+ (@ajplus) August 31, 2022
In at least two other states — California and Pennsylvania — officials have announced that despite any ambiguity still present in the state tax code, they will conform with the federal government’s adoption of the ARPA provision and will not tax the forgiven amount.