Recently, President Joe Biden announced his plans to cancel some student loan debts for millions of Americans across the country. Most borrowers making less than $125,000 per year or $250,000 for married couples filing jointly will qualify for $10,000 in forgiveness and up to $20,000 in forgiveness for Pell Grant recipients. Some states, however, may count that canceled debt as taxable income even though on a federal level it was declared tax-free, and others have deemed the loans not taxable.
What States Have Made Their Decision?
Tax implications could be seen for borrowers in many states which could range anywhere from $300 to $1,100 in maximum state tax liability based on a preliminary analysis from the Tax Foundation. As of today, 9 of these states have already decided on whether or not they will be taxing the $10,000 student loan forgiveness plan.
The states that will NOT be taxing the forgiveness are:
- New York
- Pennsylvania
- California
- Massachusetts
The States that WILL be taxing the forgiveness as taxable income are:
- North Carolina ($525 for every $10,000 forgiven)
- Wisconsin ($530 for every $10,000 forgiven)
- Mississippi (Currently unclear)
- Minnesota (Currently unclear)
- Arkansas (Currently unclear)
Other states are still currently mulling the decision on whether or not to tax student loan forgiveness, and we will continue to monitor the situation as it unfolds.
Still Time For Change
Even with this news, there is still time for the policy to change, says Jared Walczak, Vice President of State Projects at the Tax Foundation. “States could come back very early in the next legislative session, update their conformity statute and make it effective immediately,” he said. In the coming weeks and months, we may see these previously mentioned states release guidelines on how they wish to handle this issue.
Wrap Up
Hopefully, in the coming weeks and months, these states in question start offering more clarity on whether or not they will tax student loan forgiveness. Legislation may even be made by certain states so that they can make the decision at the state level, and not receive implications from the federal level, which is commonly referred to as “decoupling” in the tax industry. Many have their fingers crossed that all states decide to deem it tax-free and follow the federal government’s lead. If you have any questions on what your state’s rules and regulations are surrounding this, it is likely in your best interest to speak with a trusted tax professional today.