As millions of Americans prepare to submit student loan forgiveness requests through the Biden administration’s new program, residents of seven states could be hit with a tax bill if they agree to loan forgiveness.
These states are: Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin.
The tax provisions do not specifically target student loans, but they are part of some state laws regarding debt forgiveness broadly.
As a result, according to Jared Walczak, vice president of the Tax Foundation, a nonprofit group that supports tax reduction, state legislatures will need to act if they are to avoid penalizing some borrowers for accepting loan forgiveness. which in itself could blunt the positive impact the White House hoped to achieve through the program.
Federal data shows that more than 8 million residents in the seven states could be affected.
California is the largest state currently in line to impose student loan forgiveness. Indeed, it has yet to change its laws to comply with a provision contained in the American Rescue Plan Act of 2021 that exempted student loan forgiveness from federal tax until 2025.
According to a calculation by the Los Angeles Times, a single taxpayer earning the median annual income of about $64,000 in Los Angeles County could get an $800 tax bill for $10,000 in loan forgiveness, and a bills about $1,600 if he has $20,000 in canceled loans.
The reason is quite simple. In most cases, having an amount of money you owe written off, meaning you are no longer responsible for paying it back, is considered taxable income. This canceled debt is essentially money that you can keep in your pocket, rather than having to pay the bill for the loan.
However, California lawmakers have promised to amend the state’s tax code to exempt student debt forgiveness from taxation. On September 9, California Assembly Speaker Anthony Rendon and Senate Pro Tem Speaker Toni Atkins tweeted they would “make the tax relief exempt through immediate action in early 2023”.
“Rest assured, one way or another, California will not tax federal student debt relief,” they said.
At least two other states, Minnesota and Wisconsin, have not updated their tax laws to comply with new federal regulations related to student debt relief, according to the Tax Foundation. An estimate from Minnesota news station KMSP-TV indicates that someone who has $10,000 in forgiven loans would receive a state income tax bill of at least $535.
“If the state fails to comply with this federal law, Minnesota taxpayers whose student debt is forgiven will be required to add that amount back for Minnesota income tax purposes,” a Department of Taxation spokesperson said. state revenue to NBC News in an email.
A Wisconsin spokesperson did not respond to a request for comment.
In both of these states, lawmakers have pledged to update tax codes so that debt forgiveness taxes are not imposed.
Another Midwestern state has already announced that it will tax people who agree to debt cancellation. In a statement to NBC News, a spokesperson for the Indiana Department of Revenue confirmed that its residents will owe up to $323 for $10,000 in student loan forgiveness and $646 for $20,000 in loan forgiveness. student.
Unless changed, two Southern states are also set to tax student loan discharges: Mississippi and North Carolina. On September 14, North Carolina Governor Roy Cooper called on lawmakers to drop the tax.
“Legislative leaders need to find a solution that treats student loan forgiveness the same way they treated the PPP loan forgiveness that many of them received,” Cooper said. “Republican lawmakers have been quick to help businesses and should now right this fundamental injustice for many hard-working people who will be hit hard by this.”
On Sept. 2, the nonprofit news website Mississippi Today reported that state residents who were eligible for student loan forgiveness of up to $10,000 will see $500 in additional taxes. they accept the cancellation of the loan. Those eligible for debt relief of up to $20,000 would be required to pay up to $1,000 owed on their state taxes.
Representatives for Mississippi and North Carolina did not respond to requests for comment.
In Arkansas, the Department of Finance and Administration said Sept. 9 that “it would be inaccurate to state that student loan forgiveness will be taxable there” because its legislative session had not yet ended.
A representative from Arkansas could not be reached for comment.