States Seek to Clarify If Forgiven Student Loans Will be Taxed
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President Biden's loan forgiveness plan could result in additional tax liability in at least six states, according to a think tank. But officials in some places are taking steps to ensure the canceled debt doesn't count as income.
For borrowers who qualify for President Biden's offer to discharge up to $20,000 of student loans, the canceled debt won't count as taxable federal income thanks to a provision in the American Rescue Plan Act.
But according to the Tax Foundation, a nonprofit think tank that analyzes tax policy, loan forgiveness could result in additional tax liability in at least six states: Arkansas, Massachusetts, Minnesota, Mississippi, North Carolina and Wisconsin.
The group last week identified 13 states that could tax the forgiven loans, but later revised the estimate to the lower figure.
State lawmakers in New York say they will submit legislation to clarify that student loan forgiveness should not be viewed as taxable income, even though the state is not on the Tax Foundation's updated list.
"Relieving student debt is critical for so many across New York. It should not turn into a cash grab by the state,” Michael Gianaris, deputy leader of the New York Senate, said in a statement. “This is an important step in making it easier to access the higher education and career training New Yorkers need and deserve.”
Gianaris and state Sen. Brad Hoylman plan to introduce a bill to ensure New York's tax laws comport with the federal rules under the American Rescue Plan.
"New York state shouldn’t receive a windfall on the backs of low and middle-income student borrowers,'' Hoylman tweeted.
The Pennsylvania Department of Revenue has already issued a statement saying student loan forgiveness is not taxable for personal income tax purposes. California, similarly, has an existing law that officials say exempts student loan forgiveness from taxes.
Massachusetts Gov. Charlie Baker told WWLP of Springfield that he is waiting for federal guidance to determine how state tax policy will treat Biden's loan forgiveness plan.
In a blog post, Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation, said he expects states that could potentially tax the forgiven loans to review their policies and provide guidance soon.
"In the coming weeks and months, we are likely to see additional states issue guidance on the treatment of discharged student loan debt, and perhaps even adopt legislative fixes, causing this list to dwindle further,'' Walczak wrote.
Biden last week announced a plan to forgive up to $20,000 for low-income borrowers who received a Pell Grant and up to $10,000 for other borrowers who earned less than $125,000 annually, or up to $250,000 for married couples. Democrats say the plan will provide debt relief to 43 million people.
Daniela Altimari is a staff reporter at Route Fifty.
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