After accumulating years of student loan debt and finding out that you have been approved for forgiveness, you might be wondering whether or not you will have to pay taxes on your forgiven loans. If you live in one of the seven states listed below, the answer may be yes. If you don’t live in one of these states and have been approved to have your federal student loans forgiven, there are still some circumstances under which you may owe taxes on your forgiveness amount.
You won’t owe federal taxes if you’re one of the millions of Americans anticipating student debt forgiveness. However, that does not absolve you of responsibility at the state level.
The newest state to clarify that forgiveness will result in state income taxes is Indiana, and certain borrowers may also owe county levies.
There is no need for new administrative regulations because this statute is so clearly stated, according to a representative for the Indiana Department of Revenue. “The General Assembly must make any legislative changes.”
What Are Qualifying Loans?
State-level taxation may be viable in Arkansas, California, Minnesota, and Wisconsin in addition to Indiana, Mississippi, and North Carolina, according to a preliminary analysis by the Tax Foundation.
The group has updated its forecasts after previously estimating that 13 states may charge student loan forgiveness.
Seven states are currently projected to be able to tax student loan forgiveness: Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
In Massachusetts, tax forgiveness is unlikely, although the state hasn’t made this conclusion publicly.
Here is a list of the pending states as of right now.
Arkansas: Probably taxed
Student debt forgiveness is tax-free on the federal level through 2025 according to a provision of the American Rescue Plan of 2021, and state income taxes are dependent on whether and when states comply with federal tax regulations.
The North Carolina Department of Revenue released the same information in a news release last week, and the Mississippi Department of Revenue verified it to CNBC last week.
Of course, these tax measures, among others, might possibly alter given the turbulence in state law.
Other states may impose taxes.
State-level taxation may be viable in Arkansas, California, Minnesota, and Wisconsin in addition to Indiana, Mississippi, and North Carolina, according to a preliminary analysis by the Tax Foundation.
The group has updated its forecasts after previously estimating that 13 states may charge student loan forgiveness.
Seven states are currently projected to be able to tax student loan forgiveness: Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
In Massachusetts, tax forgiveness is unlikely, although the state hasn’t made this conclusion publicly.
Here is a list of the pending states as of right now.
Arkansas: Probably taxed
A representative for the Arkansas Department of Finance and Administration told CNBC that although no formal decision has been made, one may be in the works in the coming days.
However, the Tax Foundation claims that the state doesn’t “significantly” adhere to the federal rules, which makes it probable that forgiven student debt will be subject to taxation without state action.
Possibly taxed in California
California may also tax student loan forgiveness, depending on how the Department of Education administers the program, a spokesperson from the state’s Franchise Tax Board told CNBC.
Massachusetts: Probably tax-free
State Representative Steve Owens, a Democrat from Massachusetts, stated in a tweet that student debt forgiveness won’t be taxable even though the Massachusetts Department of Revenue hasn’t reached a final decision.
Additionally, according to a different tweet from Owens, the state has already provided guidelines on how to comply with the American Rescue Plan’s exclusion.
Mississippi: Taxable
The cancellation of student loans will be subject to state taxes, according to the Mississippi Department of Revenue, which confirmed this to CNBC.
United States: Taxable
According to a press release from the North Carolina Department of Revenue, student debt forgiveness is “currently considered taxable income.” The agency is keeping an eye on any modifications to the state’s General Assembly’s law, though.
Wisconsin: It could be taxed.
According to the Charge Foundation, Wisconsin may tax student loan forgiveness since the state tax code already conformed to federal law before the American Rescue Plan Act.
A representative for the Wisconsin Department of Revenue told CNBC that a law amendment and action from the state legislature are necessary for tax-free forgiveness.
In order to make sure Wisconsin taxpayers don’t suffer fines and extra taxes for having their debts forgiven, they added, “We will definitely resolve this disparity with federal law in our future biennial budget request.”
