Student debt relief could leave you with a higher North Carolina tax bill

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RALEIGH, NC (WNCN) — It’s become a big question: Will canceling your student debt leave you with a bigger tax bill?

Here in North Carolina, that answer might be yes — with a tax expert saying you could end up with $525.

“I think at this point there’s enough to say that (borrowers) need to start preparing for it,” said Nathan Goldman, assistant professor of accounting at NC State’s Poole College of Management.

Under President Joe Biden’s new plan, many Americans can get up to $10,000 in federal student loan debt — up to $20,000 if they qualify for Pell grants. A single borrower must earn less than $125,000 while married couples are eligible if they earn less than $250,000.

Biden says the plan could benefit 43 million borrowers across the country.

But that could come with an important string – a bigger tax bill for the state.

There is a line in the North Carolina tax code that seems to specifically address the issue of student debt relief as it relates to changes in adjusted gross income. The stated purpose of the subdivision is to “decouple from the income exclusion for the discharge of a student loan under Section 9675 of the American Rescue Plan Act of 2021.”

This line in the state tax code could mean you’ll have to pay $525 in state tax if you had $10,000 of your federal student loan debt forgiven under President Joe’s recently announced plan. Biden. (Credit: North Carolina General Assembly)

Clearly, this is the clause that says the state can, in fact, impose this student debt relief. That means a North Carolina person receiving $10,000 in relief would owe $525 in state tax, Goldman said.

“At least at this current point, we can see that we have enough evidence to say that they could be in the crosshairs of having to repay taxes in the state of North Carolina,” Goldman said.

But there’s still plenty of time for lawmakers and Governor Roy Cooper to change that — something Goldman says it did when it made the stimulus payments earlier in the COVID-19 pandemic tax-free.

The bailout says all federal student loan forgiveness is tax-free through 2025, so at least you won’t owe federal taxes on it.

“But not every state needs to follow suit,” Goldman said.

An early breakdown from the Tax Foundation listed 13 states that could treat this debt relief as taxable income — but North Carolina was not on that list.

The Washington-based think tank then released an update this week, narrowing the list to five states – but adding North Carolina, citing the aforementioned tax code clause.

This has led to vagueness and uncertainty as to whether this line of the code will actually be enforced.

“There may not be a lot of communication at the state level,” Goldman said. “So states may have different laws in place for different things. But if they don’t expect something like that to happen, then maybe they don’t have a law in place yet.

So if you don’t want to pay the tax, what can you do?

You can contact your state legislators to urge them to change this line of the code.

And with 7.5 months until April 15, 2023, if you might have to pay that extra amount in taxes, now is the time to start planning.

Especially if you have to start paying your remaining student loan balances again around that time.

“Some people have gotten used to not having to pay that money over a long period of time, and they should start planning ahead, start saving money, and start adjusting their finances,” Goldman said. “That way, they’re ready to start repaying student loans in early 2023.”

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