California to Tax Biden’s Student Loan Forgiveness

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California to Tax Biden’s Student Loan Forgiveness

President Biden’s offer in August of up to $20,000 in broad federal student loan forgiveness was certainly welcomed by millions of qualified students, but it also raised some issues. Fortunately, the White House subsequently published a press release that clarified many of these questions, including clarifying that the debt relief would not be taxed. However, it is unclear whether it will be deemed income for state income tax reasons. While several states, such as New York, have previously promised people that student debt forgiveness would not be taxed, California became the first to affirm the inverse this week.

Here’s what to know.

Key Takeaways

  • According to the Tax Foundation, California has verified that Biden’s student loan forgiveness would be treated as income for state tax reasons.
  • Despite the fact that the American Rescue Plan Act exempts canceled student debt from federal income taxes, state income taxes may still be assessed.
  • According to the Tax Foundation, Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin may additionally tax discharged student loans.

Student Debt Relief & Income Taxes

According to Internal Revenue Service (IRS) regulations, any taxable amount of forgiven or discharged debt is classified as ordinary income and is therefore liable to federal and (possibly) state income taxes. While the American Rescue Plan Act exempts some discharged federal, private, or educational student loans from federal income taxes until September 30, 2025, state governments may still decide how to handle forgiven debt.

Most states either do not collect a state income tax at all or have already approved legislation that match the federal approach of student debt relief to some extent. However, a tiny number of state governments are presently planning to charge an income tax on the canceled educational debt.

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What makes California’s ruling somewhat unexpected is that, although its current laws imply that student debt forgiveness is taxable, past state consensus went in the other way. Nonetheless, the Tax Foundation reports that discharged student loan debt will be taxed under existing California law. Furthermore, current state regulations exempting student loans canceled as part of income-based repayment schemes would no longer apply.

Which States May Follow California’s Lead?

According to the Tax Foundation’s study, Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin are now on pace to tax student debt forgiveness. The Tax Foundation’s list originally contained Massachusetts, but the Hoosier State has now replaced it.

It should be noted that, unlike California, these six states do not guarantee that student debt relief would be treated as taxable income. If state authorities decide to amend current legislation, the ultimate tally may be much lower by the time borrowers get their student loan forgiveness.

The Tax Foundation anticipates that additional states will publish advice on how canceled student debt will be handled in the coming months. Given that California’s decision was somewhat surprising, citizens of any state that has not yet confirmed tax treatment for Biden’s student debt forgiveness should check with their local state tax department on a regular basis for any new pronouncements.

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