Millions of Americans will soon be free of student loan debt thanks to President Joe Biden. The cancellation could still cause a state tax bill.
Most borrowers making less than $125,000 per year or $250,000 for married couples filing together will be eligible for forgiveness.
The tax foundation's vice president of state projects explained that some states may count canceled debt as income.
Do your student loans qualify for federal forgiveness? Do you qualify for student debt relief?
According to a preliminary analysis from the organization, borrowers in more than a dozen states may be affected by this.
The analysis shows that Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin may be included.
According to the White House, the American Rescue Plan made student loan forgiveness tax-free through 2025, and the law covers Biden's forgiveness as well.
The federal tax code is a baseline for how states define taxability, according to Walczak.
As federal laws change, some states may only conform from a certain date, while others may need to update their tax legislation.
There are a patchwork of approaches, most of which never really about student loan debt.
Some states may be able to make their tax code their own.
Since canceled debt is generally tax deductible, there are a lot of different approaches.
There is still time for policy changes despite the fact that some states may tax student loan forgiveness.
He said that states could come back very early in the next session to update their statute.
Some states may use administrative guidance or a regulatory ruling.
He said it was best to speak with a local tax professional if you were unsure.
Walczak said that the issue is not a niche one. It affects a lot of people and hopefully there will be clarity on it.
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