Student Debt Forgiveness May Be Taxed

While the billions of dollars in student loan debt forgiveness are exempt from federal taxation, in many states it may be taxed on a state level. Taxpayers could see $500-$1,100 in state taxes depleted from their loan forgiveness, according to Jared Walczak, vice president of state projects at the Tax Foundation.

The American Rescue Plan Act (ARPA) protects student loan debt forgiveness dollars from federal taxation because of its exemption for discharge of indebtedness for years between 2021-2025. However, some states have not given this type of exemption for its citizens.

States that will not tax debt forgiveness are those with a high level of “Conformity” – how a state aligns completely to the Internal Revenue Code. 13 States have not fully conformed to the Internal Revenue Code. These are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin. If you live in one of these states, you should consult with a tax preparer regarding your student loan forgiveness being taxed. Ask your tax preparer about how your state is interpretating of state discharge and indebtedness rules.

These states may still pass exclusion laws to avoid this taxing, however, the new law would have to be passed within the next four months to prevent the student debt forgiveness from being taxed. You will most likely see $500-$1,100 taxed from your student loan forgiveness, varying from state rates and other nuances.

If you need help with student loan forgiveness or need help with other tax-related issues, use this link to see if you are eligible for a free consultation.