These 7 states have tax policies on the books that could result in your canceled student loans being taxed as income: North Carolina, Indiana, Mississippi, Arkansas, Minnesota, Wisconsin and California. Here's what to know.
When federal student loan borrowers take a breath from celebrating the cancelation of some or all of their federal student loans, millions of them could be in for a nasty surprise:won't be subject to federal income tax, in seven states borrowers may have to payBefore 2021, student debt cancelation was generally considered a form of income, and therefore taxable both at the federal and usually state level.
In an email to NPR, a spokesperson for the Arkansas Department of Finance and Administration says,"Our Department is currently reviewing whether debt forgiveness in this scenario is subject to state income tax in Arkansas. If we determine this is indeed subject to state income tax, legislative action would be required to change/exempt it. The next session of the Arkansas General Assembly is scheduled to begin in early 2023."Now the murky gets even murkier.
"If the state does not conform to this federal law, then Minnesota taxpayers who have their student debt discharged will have to add back this amount for Minnesota income tax purposes."Like Minnesota, Wisconsin also conforms to outdated federal tax policy, in this case from 2020, just a few months before the ARPA exempted student debt relief.
In an email to NPR, a spokesperson for the California Franchise Tax Board says they can't yet say if debt relief in California will be taxable because they need more information from the U.S. Department of Education."We are saying the loan forgiveness would be taxable in California UNLESS this federal student loan debt is repaid or canceled pursuant to 1098e of Title 20 of the United States Code.
President Biden's loan forgiveness plan would cancel up to $10,000 in debt for individuals who earn less than $125,000 a year, or less than $250,000 a year for couples; and it would cancel up to $20,000 for borrowers who received a Pell Grant in college and meet those income requirements.
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