13 states can hit borrowers with state tax liability on forgiven student loans
Chairperson Joe Biden‘S Student loan forgiveness plan will soon write off the debt of millions of Americans – and the relief is tax exemption on federal returns. However, experts say the cancellation could still trigger a state tax bill.
Most borrowers making less than $125,000 per year or $250,000 for married couples filing together will be eligible for a $10,000 forgiveness, with up to $20,000 in cancellations. Pell Grant Recipients.
However, some states may count canceled debt as income, explains Jared Walczak, vice president of state projects at the Tax Foundation.
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This could affect borrowers in more than a dozen states, adding up to a maximum state liability of 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 showed.
‘Patchwork approaches’ to state taxes
Plan to rescue Americans in 2021 is implemented federal tax exempt student loans through 2025, and the law also includes Biden’s pardon, according to The White House.
“In general, states use the federal tax code as the basis for how they determine taxability,” says Walczak, explaining how some states use what is called “conformity” to subject to certain federal laws.
Some states have “rotating compliance,” which updates state tax laws as federal law changes, and others may only comply from a certain date, which may require updating. to be consistent with existing law, he said.
There are a bunch of patchwork approaches, most of which are never really about student loan debt.
Vice President of State Projects at Tax Foundation
In some cases, states can “split” from some federal regulations to make their own state tax code, Walczak said.
Since canceled debts are often taxable, “there are a number of patchwork approaches, most of which are never really about student loan debt,” he said.
State tax forgiveness may vary
While preliminary analysis suggests some states may tax student loan forgiveness, there is still time to change the policy, Walczak said.
“Countries can come back very soon in the next legislative session, update the compliance statute and make it effective immediately,” he said.
And while it’s “obvious” in some states, others may rely on administrative guidance or a legal ruling, Walczak said.
If you’re unsure, it’s best to talk to a local tax professional and follow guidance from your state, he suggests.
“This is not a niche problem that affects only a few people,” says Walczak. “It affects a very large number of people and hopefully, there will be clarity about it.”