By Maria Carrasco, NASFAA Staff Reporter
While President Joe Biden’s student loan debt relief won’t be federally taxed, millions of borrowers may have to pay state income tax if they receive the relief.
Most states will follow the federal government’s lead and not tax Biden’s loan relief, but the states that could tax borrowers are Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin, according to Jared Walczak, vice president of state projects at the Tax Foundation.
Walczak said under the American Rescue Plan Act (ARPA), which was signed into law in March 2021, forgiveness of student loan debt between 2021 through 2025 doesn’t count toward federal taxable income. States that follow the federal rule won’t tax forgiven loans under the state income tax bases. However, not all states conform to the current version of federal tax laws, Walczak said.
According to Walczak, the historic presumption of federal and state debt relief is that any debt relief at either level is presumed taxable, unless otherwise specified.
“So [student loan debt relief] would have been taxable income at the federal level a little over a year ago," Walczak said. "But the American Rescue Plan Act had a provision that excludes student loan debt cancellation between 2021 and 2025, from federal taxability.”
The reasons why some states don’t conform to the current version of federal tax law are because a state could conform to the current version of the Internal Revenue Code but decouple from ARPA, or the state could conform to a pre-ARPA version of the Internal Revenue Code, Walczak said. The Tax Foundation released a blog post with more information detailing the tax implications of Biden’s student loan debt relief.
Some states have already confirmed that without action from state lawmakers, Biden’s student loan debt relief will be taxed, while others are waiting to see what action their state legislature will take. Walczak said he understands the relief would be taxed to borrower’s 2022 income, which will be filed in the spring of 2023.
Arkansas: A spokesperson from the Arkansas Department of Finance and Administration told NASFAA the state hasn’t confirmed if Biden’s student loan debt relief will be taxed. While the forgiveness of a debt is generally included in a taxpayer’s gross income in Arkansas, state lawmakers may exempt the relief from being taxed in January, the spokesperson said.
“The General Assembly meets in January and may take similar action to exempt this student debt forgiveness,” the spokesperson said. “It would be inaccurate to report student loan forgiveness will be taxable in Arkansas as we won’t be certain until the legislative session is complete and the complete details of the loan forgiveness plan are finalized and announced by the U.S. Department of Education.”
California: According to top California Democrat leaders in the state legislature, Senate President Pro Tempore Toni Atkins of San Diego and Assembly Speaker Anthony Rendon of Lakewood, “once the federal government finalizes details of the student debt relief program, we will know whether the relief is tax exempt under current California law.”
“If not, we will make the relief tax exempt through immediate action in early 2023,” the lawmakers tweeted. “Rest assured, one way or another, California will not tax the federal student debt relief.”
The California Franchise Tax Board told The Los Angeles Times in order to know if Californian borrowers will be taxed for Biden’s loan forgiveness, “we would need to know whether the U.S. Department of Education will administer the program under Section 1098e of Title 20 of the United States Code, or use some other method.”
Indiana: The Indiana Department of Revenue confirmed to the Associated Press that residents are required to list their forgiven loans as taxable income per Indiana law.
Minnesota: A spokesperson for the Minnesota Department of Revenue told NASFAA that there was a provision in Gov. Tim Walz’s tax bill to conform to the ARPA, but the legislation wasn’t passed, so Minnesota is currently out of conformity with federal law in that area.
“If the state does not conform to this federal law, then Minnesota taxpayers who have their student debt discharged will have to add back this amount for Minnesota income tax purposes,” the spokesperson said.
Mississippi: Borrowers who receive Biden’s student loan debt relief will be subject to income taxes in Mississippi, the state Department of Revenue confirmed to Bloomberg.
North Carolina: The North Carolina Department of Revenue released an announcement saying the state’s General Assembly did not adopt a section of the Internal Revenue Code, so student loan forgiveness is currently considered taxable income in the state.
“The Department of Revenue is monitoring any further enactments by the General Assembly that could change the taxability of student loan forgiveness in North Carolina,” the announcement states.
Wisconsin: A spokesperson for the Wisconsin Department of Revenue told NASFAA that excluding debt forgiveness from being taxed requires a statutory change and action on the part of the state legislature. The spokesperson noted that the move cannot be done administratively by the department and a change has yet to be passed by the state legislature.
“As instructed by Governor Evers, we have addressed this discrepancy with federal law in our department's biennial budget request, in an effort to ensure Wisconsin taxpayers don’t face penalties and increased taxes for having their loans forgiven,” the spokesperson said. “The legislature could also pass legislation when they are back in session, which won't be until January.”
The White House earlier this week released information with estimates of how many borrowers will be impacted by Biden’s student loan debt relief in each state. The fact sheet, according to ED, is based on Census data used to estimate borrower income.
“States do make conformity updates early in the year sometimes and we may see some states acting in January with emergency legislation, meaning that it goes into effect when it's enacted rather than waiting until July 1 or the start of the new fiscal year,” Walczak said. So we may see things acting on this in late January, but if you push it too much beyond that, there are a lot of complexities that arise.”
Publication Date: 9/26/2022
Paul F | 9/26/2022 3:52:11 PM
Indiana recently issued legally mandated refunds to all taxpayers due to an excessive state budget surplus. Obviously there's a strong need to tax this non-income.
Jose E | 9/26/2022 9:6:03 AM
PSLF specifically states that it is tax-free forgiveness. All states must follow this since it is congressional law, unlike the Biden forgiveness that is a Presidential Order or part of the ARPA, another presidential order.
Gary B | 9/26/2022 8:27:04 AM
Is PSLF taxable as well? I have had conversations about which to take if eligible for both (especially if 10K does not clear the debt.)
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