According to an analysis by the Tax Foundation, as many as 13 states will consider President Joe Biden’s student loan forgiveness a taxable event, levying as much as $1,100 in taxes to some borrowers who receive a $10,000 break.
When announcing plans to forgive as much as $20,000 in student loans, Biden said provisions in the American Rescue Plan would render the forgiven debt non-taxable.
However, the law doesn’t exempt loan forgiveness at the state level.
“As a general rule, a discharge of indebtedness counts as income and is taxable,” Jared Walczak wrote for the Tax Foundation.
“Under the American Rescue Plan Act (ARPA), however, the forgiveness of student loan debt between 2021 and 2025 does not count toward federal taxable income. States which follow the federal treatment here will likewise exclude debt forgiveness from their own state income tax bases.
“But, for a variety of reasons, not every state does that. There are at least six relevant interactions with the Internal Revenue Code (IRC) for purposes of the treatment of student loan debt cancellation.”
Those receiving $10,000 in loan forgiveness are now facing 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 individuals receiving $20,000 in debt relief.
He noted that in several other states, tax officials have indicated that there will be no tax on student loan debt discharge despite ambiguity in state law.
“California, for instance, does not conform to a post-ARPA version of the IRC but has a provision in existing law exempting student loans canceled according to income-based repayment programs,” Walczak wrote.
“Legislation expressly conforming to the new federal law failed, but state revenue officials seem to be taking the position that the forgiveness announced by the Biden administration will be covered by the existing law.”
Similarly, Walczak noted that officials in Pennsylvania have announced that the Biden administration’s cancellation of student loan debt is not taxable.
In the coming weeks and months, Walczak added that it’s likely that additional states would issue guidance on the treatment of discharged student loan debt and perhaps even adopt legislative fixes, causing this list to dwindle.
While the debt – if retained – would have been paid over a period of years, the debt cancellation is included in income in the year it is taxed.