Student loan forgiveness could be taxable in some states

Morning In America

Note: An earlier version of this story sourced the Tax Foundation saying as many as 13 states could tax student loan forgiveness and included potential amounts owed. The Tax Foundation has since amended their list and removed those estimates. NewsNation has removed all of the Tax Foundation’s information from this article.

(NewsNation) — Those receiving student loan forgiveness would not be taxed federally, but some people could get taxed at the state level.

Last week, President Joe Biden announced student debt cancellations of $10,000 for those who earn less than $125,000. People who received Pell Grants can get $20,000 forgiven.

Under the American Rescue Plan, the federal government will not tax student loan forgiveness again until 2025. Several states’ tax plans are coupled to the federal code, meaning changes at the federal level kick in at the state level. But states that don’t fall under that rule could come calling for a piece of the forgiven debt if they don’t amend their statutes.

Mississippi has come out against making an exception for Biden’s debt relief recipients, Bloomberg reports.

Other states, such as Pennsylvania and California, have issued notices clarifying residents won’t be taxed on their debt relief. New York will also not list it as taxable income, the Gothamist reports.

But several states still have decisions to make. Arkansas, for example, would need to make an exception. Scott Hardin, a spokesperson for the Arkansas Department of Finance and Administration, told NewsNation the department’s legal team is reviewing the federal tax changes and a final decision should come “over the next couple of days.” The move would require legislative action.

Massachusetts Gov. Charlie Baker said his state is still waiting for federal guidance on how this will work, according to NewsNation local affiliate WWLP. By default, residents could be liable for hundreds of dollars, depending on the size of the debt forgiven.

Minnesota also needs to amend its tax code to whitelist the student debt relief, but is not scheduled to return to session for the rest of the year. State Sen. Carla Nelson (R), the chair of the Senate Tax Committee, has called for a special session to iron it out.

“I think that should be one of the first bills out the door, next session. Just like we did with unemployment insurance — not taxing those unemployment insurance benefits — or not taxing those Pandemic PPP loans, we felt the same the same about the forgiven student loans,” Nelson said, according to KARE11.

In Minnesota, Republicans control the Senate, but Democrats control the House and governor’s mansion. Nelson’s willingness to make student debt forgiveness work could signal a path to a compromise.

A similar situation would be required in Wisconsin, though Democrats may have a more difficult time delivering. Gov. Tony Evers (D) has signaled he wants to find a way to avoid taxing student debt relief, but would need to get it through the Republican controlled House and Senate.

North Carolina’s tax code also lists forgiven student debt as income, but there is a chance they will amend it. They changed their tax laws during the pandemic to allow Paycheck Protection Program loans to go tax free.

States and debt-holders alike are waiting for clarification on how this will work. For now, anyone interested can sign up for an email list from the Education Department to get updates on the specifics.

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