Some States Will Tax Federal Student Loan Forgiveness

Last month, President Biden announced that the federal government will forgive up to $20,000 of federal student debt per borrower subject to income limitations—$125,000 per year or $250,000 if married. Generally, debt forgiveness is taxable income unless excluded under Section 108. In anticipation of some type of student loan forgiveness, the American Rescue Plan of 2021 amended paragraph Section 108(f)(5) to specifically exclude from a taxpayer’s gross income any amount of student debt that is forgiven from 2021 to 2026. As such, the relief granted under Biden’s order is not taxable for federal income tax purposes. 

However, taxpayers should be aware that state taxing authorities do not necessarily follow the Federal Internal Revenue Code to calculate taxable income. Currently, most states choose to conform their tax systems to the federal tax system. This means the remaining states must take some sort of action, whether through guidance or legislative change, to make the forgiveness non-taxable.

Below is a table listing the non-conforming states by their status, as of the date of this article, as either (1) confirmed they will not tax the loan forgiveness, (2) confirmed they will tax the loan forgiveness, and (3) undecided and must take further action to make the loan forgiveness non-taxable.

Non-TaxableTaxableUndecidedHawaiiCaliforniaArkansasIdahoIndianaMinnesotaKentuckyMississippiWisconsinMassachusettsNorth Carolina New York  Pennsylvania  Virginia  West Virginia  

With Biden’s announcement not even a month old, changes to this list may occur at any time. Although most state legislatures are not meeting for the remainder of the year, state administrative and executive agencies may release guidance altering how their state will handle the loan forgiveness. 

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.