New York Won’t Tax Biden’s Student Loan Forgiveness

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New York Won’t Tax Biden’s Student Loan Forgiveness

President Biden stated last week that he would forgive up to $20,000 in federal student debts, offering much-needed relief to millions of qualified students. In addition, the White House affirmed in a press statement that this aid would not be subject to federal income tax. However, depending on where they reside, borrowers may still owe taxes on their canceled student debt. On Monday, New York state authorities said that forgiven school debts would not be treated as taxable income; however, six states may still do so.

Here’s what to know.

Key Takeaways

  • According to the Tax Foundation, the following states may be eligible for tax-free student debt forgiveness: Arkansas, Massachusetts, Minnesota, Mississippi, North Carolina, and Wisconsin.
  • Previously, New York was included in the Tax Foundation study. However, the New York State Department of Taxation and Finance subsequently verified that the forgiven student loans would not be included as taxable income.
  • Senate Deputy Majority Leader Michael Gianaris and New York State Senator Brad Holyman want to submit legislation to guarantee that this student loan relief is not taxed in New York.

Student Loans: Federal vs. State Income Taxes

The Internal Revenue Service (IRS) normally requires that any taxable amount of forgiven or discharged debt be considered as ordinary income, making it liable to federal and (if applicable) state income taxes. However, the American Rescue Plan Act of 2021 rendered any sums discharged from certain federal, private, or educational student loans ineligible for federal income tax purposes until September 30, 2025.

  If I Reinvest My Dividends, Are They Still Taxable?

When it comes to student debt forgiveness, state governments do not necessarily follow the federal government’s example. Many states have already matched their legislation with the current edition of the Internal Revenue Code (IRC), which contains the American Rescue Plan’s provision of student debt relief, or are one of nine states that do not impose any state income tax. In contrast, numerous states’ statutes contradict the federal tax treatment of the American Rescue Plan. If these states do not amend their current legislation, or are unable to do so before borrowers get student debt forgiveness, their inhabitants may be on the hook for a sizable state tax bill.

The States That May Tax Discharged Student Debt

According to a Tax Foundation research, Arkansas, Massachusetts, Minnesota, Mississippi, North Carolina, and Wisconsin are now on pace to possibly tax student loan debt forgiveness. However, if any of these states make legislative modifications to assure that this debt relief is free from state income taxes, the actual number of states may have dropped by the time borrowers obtain student loan forgiveness.

This is not simply hypothetical; it has actually occurred. When the Tax Foundation’s report was first released on August 25, it listed New York among the states it examined. However, the New York State Department of Taxation and Finance notified the Gothamist yesterday that the forgiven student loans would not be considered income for state income tax reasons.

The NYS Department of Taxation and Finance did, however, caution that if the New York State Legislature intervenes and requires that student debt relief be subject to state income taxes, this proposal might be blocked. Fortunately, Senate Deputy Majority Leader Michael Gianaris and New York State Senator Brad Holyman both told Gothamist that they intend to file legislation to ensure that forgiven debts are not taxed in New York.

  Tax Deferred Definition

On August 26, state authorities responded to a query posted to the Pennsylvania Department of Revenue’s website, stating that the Biden administration’s cancellation of student loan debt would not be subject to the state’s income tax. According to the Tax Foundation, the justification for this decision is unclear, since student debt relief has generally been thought to fall within the established classifications of taxable income.

The Tax Foundation anticipates that additional states will publish advice on how canceled student loan debt will be handled in the coming months. As a result, residents of the six states named above should keep an eye out for any information on the subject provided by their state tax department.

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