State tax adds liability to canceled student loans

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Although there is now apparently such a thing as a free lunch – for some – those lucky people might still need to leave some sort of tip.

We’re referring to student borrowers with $10,000 or $20,000 debt forgiveness who could pay the price for the Biden administration’s largesse.

At least in Massachusetts and a few other states.

According to the Tax Foundation, the Bay State is one of 13 states that could tax this discharged student loan debt as income.

The Tax Policy Think Tank estimates that Massachusetts student borrowers with $10,000 of forgiven debt could be subject to 5% state income tax and therefore be liable for a $500 payment. $.

That would double to $1,000 in state taxes if they were Pell Grant recipients — estimated to be 60% of student borrowers — with $20,000 in debt discharged.

Under President Biden’s student debt relief executive order, those earning less than $125,000 — or $250,000 for couples filing taxes jointly — will be eligible for up to $20,000 in debt relief. debt relief, completely wiping the slate clean for around 20 million borrowers.

The White House has estimated that about 43 million Americans with student debt will be eligible for the rebate, while 90% of that relief will go to those earning less than $75,000.

Biden also extended the pandemic-era student loan payment moratorium “one last time” through the end of the year.

The plan further aims to make the student loan repayment process easier, allowing borrowers to cap repayment at 5% of their monthly income and up to 20 years.

But in this state, the Department of Revenue could inject a dose of responsibility into this debt reduction gift.

“Some states have tax implications for student loan debt, and we are currently reviewing 13 states that may tax student loan debt,” Garrett Watson, senior policy analyst at the Tax Foundation, told the Boston Herald recently.

He noted that the list of states also includes New York, Pennsylvania, Virginia, Minnesota, Wisconsin and Arkansas.

“These states will have the ability to decide if it’s taxable,” Watson said. “They’ll have to state if it will be taxable so people know what’s going on.”

Prior to 2021, student borrowers had to pay federal tax if a debt was forgiven. But under the American Rescue Plan Act, the IRS will not consider forgiveness of student loan debt in the years 2021 through 2025 as federal taxable income.

Through the American Rescue Plan Act, states received indirect taxable benefits, which generated higher income tax collections.

“It would be on a smaller scale,” Watson said. “But states deciding that it’s taxable would derive additional revenue from it.”

This is not the only potential state tax implication arising from the write-off of this loan.

Massachusetts also allows a personal income tax deduction for tuition fees. To be eligible for the deduction, tuition fees must exceed 25% of income.

The Student Loan Forgiveness Plan may end up reducing the number of taxpayers eligible for this tax benefit.

“By forgiving these expenses, I think fewer people will qualify for the tuition deduction,” Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, told the Herald. “In some ways, we might see a slight increase in income tax collections as fewer people will be eligible for the deduction.”

The DOR, which did not immediately respond to comments on this report, can of course decide to follow the lead of the federal government and not count loan relief as income.

That still leaves that tuition deduction in jeopardy for some taxpayers.

However, leaving this tax liability on the books would hopefully send a message – albeit a weak one – that loans potentially impacting a person’s future economic viability should be weighed against all possible outcomes of this debt decision.

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