No federal tax on student loan forgiveness; states could charge

Many VERIFY readers have asked if student loan forgiveness will be taxed. You won’t have to pay federal tax on canceled loans, but states may tax it as income.

Student borrowers who earn less than $125,000 a year will have between $10,000 and $20,000 in federal student loan debt forgiven, President Joe Biden announced Aug. 24.

Since the announcement, VERIFY has received many questions from readers about what exactly this means for the US student borrower.

Many of those questions were about federal and state taxes, like that from viewer Loralea, who asked if their state would tax loan forgiveness.

THE QUESTION

Will people who receive student loan forgiveness have to pay federal or state taxes?

THE SOURCES

THE ANSWER

People won’t pay federal taxes on the forgiveness of student loans, but states could decide to tax federally forgiven money as income. So far, no state has announced it will give a tax rebate, and at least one has said it won’t.

WHAT WE FOUND

The American Rescue Plan Act (ARPA) of 2021 was passed in March 2021 as part of a COVID-19 relief package that stipulated that any debt canceled from December 21, 2020 through January 1, 2026 would not count as income .

That means eligible borrowers don’t have to pay federal taxes on any student loan forgiveness until Dec. 31, 2025, Andrew Lautz, director of federal policy for the National Taxpayers Union Foundation, told VERIFY.

What happens after that is unknown at this time because we don’t know what decisions Congress and future presidents will make years from now, Lautz said.

Whether states will mandate loan forgiveness depends on what state lawmakers decide, Lautz told VERIFY. So far, no state has announced it will tax the rebate, and at least one state has said it won’t tax it.

“I anticipate that many states will follow the federal government’s lead in making sure debt forgiveness is not taxable, but that will vary from state to state,” Lautz said.

States that income tax could theoretically charge borrowers state income taxes on forgiveness, but some have already agreed to exclude student loan forgiveness from tax.

Oregon, for example, will follow federal tax law regarding taxable income on personal income tax returns, which means Oregon borrowers will not be subject to state tax on the amount of student loan forgiven, said Robin Maxey, spokesperson for the Oregon Department of Revenue. CHECK.

On August 25, a day after Biden’s student loan cancellation plan was announced, the Tax Foundation released a list of possible states that could tax student debt cancellation, unless those states change their policies in the meantime.

  • Arkansas
  • Hawaii
  • Idaho
  • Kentucky
  • Massachusetts
  • Minnesota
  • Mississippi
  • New York
  • Pennsylvania
  • Caroline from the south
  • Virginia
  • West Virginia
  • Wisconsin

The projected maximum tax liability for borrowers in these states ranges between $307 and $1,100 per $10,000 in student loan forgiveness.

“In the weeks and months to come, we’ll likely see states release guidance on the treatment of discharged student loan debt,” the Tax Foundation said.

To check if your state will tax student loan forgiveness amounts, check for updates with your local revenue department.

Editor’s Note: This article will be updated as states announce new tax policies related to student loan forgiveness.

If you have questions about student loan forgiveness eligibility, read our highlights.

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