Will forgiven student loan debt be taxable?
Q: I’m hopeful that my student loan debt will be forgiven if President Biden’s plan makes it through court challenges. But if it does, am I going to be hit by a tax bill? A: That depends on where you live.
Student loan debt that’s canceled under President Biden’s program will not be taxed by the federal government. But it still might be taxed by your state.
Generally, the IRS has considered forgiven debt to be taxable for federal income tax purposes. But the American Rescue Plan Act of 2021 effectively made student loan forgiveness nontaxable for federal income tax purposes through 2025.
Whether you will owe state taxes on student loan forgiveness depends on whether you live in a state that does not conform to the federal government’s stance on student loan relief. These include Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin.
The reason why some of these states might consider forgiven student loan debt to be taxable income has to do with a concept called conformity. Basically, when the federal government enacts laws — in this case, laws that impact the Internal Revenue Code — many states readily conform relevant statutes, rules and regulations to the new federal tax treatment.
So, what does that mean for you? Well, an initial analysis by the Tax Foundation showed that tax liability for student loan forgiveness in various states could range from a little over $300 to as much as $1,100.
So, if you live in Mississippi, for example, the maximum amount of state tax liability would be $500.
However, that calculation assumes that you are eligible for the full $10,000 of loan forgiveness for individuals with income under $125,000 a year. And if you are a Pell Grant recipient in one of the states that will tax forgiven student loan debt and are eligible for up to $20,000 in student loan relief under President Biden’s plan, your state tax liability could be higher.
It should be noted that with the exception of Indiana, Mississippi and North Carolina, some of the states could find a timely legislative way to exclude student loan forgiveness from taxable income. (California has indicated that forgiven student loan debt is “generally taxable.”)
If you live in one of the states that could or will tax student loan forgiveness, you will want to stay tuned to any guidance or information that is made available on the issue.