13 states may hit borrowers with state tax liability on forgiven student loans

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President Joe Biden’s student loan forgiveness plan will soon forgive debt for millions of Americans — and the exemption is tax-free on federal returns. However, experts say the cancellation could still lead to a tax bill from the state.

Most borrowers who earn less than $125,000 per year or $250,000 for married couples applying together are eligible for $10,000 in forgiveness, with up to $20,000 cancellation for Pell Grant recipients.

However, some states may count the forgiven debt as income, explains Jared Walczak, vice president of state projects at the Tax Foundation.

More from Personal Finance:
What Biden’s Student Loan Waiver Means For Your Taxes
Are your student loans eligible for federal forgiveness?
How to Check Your Eligibility for $20,000 in Student Debt Relief?

This could affect borrowers in more than a dozen states, with maximum state liability ranging from about $300 to $1,100, according to Walczak, based on a preliminary analysis from the organization.

These states could include Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin, the analysis shows.

‘Patchwork of Approaches’ for State Taxes

The 2021 US bailout plan made student loan forgiveness federally tax-free until 2025, and the law also covers Biden’s forgiveness, the White House said.

“In general, states use the federal tax code as the basis for how they define taxability,” Walczak said, explaining how some use so-called “conformity” to follow certain federal laws.

Some states have “rolling compliance,” where state tax laws are updated as federal laws change, and others can’t conform until a certain date, which may require updates to comply with current law, he said.

There is a patchwork of approaches, most of which are never really about student loans.

Jared Walczak

Vice President of State Projects at the Tax Foundation

In some cases, states can “detach” from certain federal provisions to make the state’s tax code their own, Walczak said.

Since canceled debts are generally taxable, “there’s a patchwork of approaches, most of which were never really about student loans,” he said.

The tax treatment of state forgiveness may change

While the preliminary analysis shows that some states are taxing student loan forgiveness, there is still time for policy changes, Walczak said.

“States can come back very early in the next legislature, update their Statute of Conformity and have it come into effect immediately,” he said.

And while it’s “clear” in some states, others may rely on administrative guidance or a regulatory ruling, Walczak said.

If you’re not sure, it’s best to talk to a local tax professional and look for guidance from your state, he suggested.

“This is not a niche problem that only affects a few people,” Walczak said. “It affects a very large number of people and hopefully there will be clarity about it.”

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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