Those excited about the forthcoming student loan forgiveness are now finding out that they may wind up getting hit with a state tax bill on forgiven loans.
While the student loan forgiveness is set to be tax-free on federal returns, some experts have said that the cancellation may wind up triggering a state tax bill, as some states may count the cancelled debt as income.
The rules could affect borrowers in more than 12 states, according to a writeup by CNBC. They may also add a state liability of roughly $300 to $1,100, the report says. The states that may be included are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin, the report says.
As a result of the American Rescue Plan of 2021, the forgiveness is Federally Tax Free through 2025.
Jared Walczak, vice president of state projects at the Tax Foundation, said: “Generally speaking, states use the federal tax code as a baseline for how they define taxability.” States use “conformity” to follow Federal legislation, he said. In rare cases states may decouple from Federal guidelines and make their own.
He said of handling the forgiveness: “States could come back very early in the next legislative session, update their conformity statute and make it effective immediately. This is not a niche issue that only affects a few people. It affects a very large number of people and hopefully, there will be clarity provided on it.”
Many borrowers making under $125,000 per year individually or $250,000 per year married will qualify for up to $10,000 of forgiveness under the bill. Pell Grant recipients will receive up to $20,000 in forgiveness.