Millions of student loan borrowers are anticipating the Supreme Court’s decision regarding broad federal loan relief. But if debt relief is approved, will you still owe taxes in 2023?
The chance is decreasing as 2022 comes to an end. However, if the debt is forgiven in early 2023, you might owe state or local taxes on it in 2024.
Can You Be Taxed Through Student Loan Forgiveness?
However, a loophole tucked away in the $1.9 trillion American Rescue Act COVID-19 relief package will prevent you from paying federal taxes on any forgiven student debt until 2025.
Your tax obligation is the same whether you qualify for forgiveness under the Public Service Loan Forgiveness program, the Federal Student Loan Cancellation Plan, or another scheme. Here is all the information you need about the impact of student loans on your tax statement.
We’ll also discuss a few tax breaks that could reduce your tax liability or increase your refund the following year.
Despite a temporary suspension of federal taxes on forgiven student debt through 2025, forgiven school loan balances are generally subject to income tax.
In other words, if you receive student loan forgiveness, this sum will be added to your adjusted gross income, which is the amount you made the previous year, less any allowable tax deductions.
Therefore, your income would be adjusted to $70,000 for the year if you earn $50,000 yearly and qualify for $20,000 in debt relief. States and local governments also tax student loan forgiveness as income.
Most states won’t tax forgiven student loan balances, but a few will. We know that North Carolina, Mississippi, Minnesota, and Indiana all intend to tax-forgive student loans.
Furthermore, Wisconsin and Arkansas may follow suit even though they haven’t explicitly stated their tax intentions.
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How Do States Taxes Cost You?
Your state and local tax rates will determine how much you owe if you live in a jurisdiction that taxes forgiven student loans. While some states have progressive income tax rates, where you pay a greater rate if you’re in a higher tax category, others have flat income tax rates.
Indiana (3.23%) and North Carolina (4.99%) have flat tax rates. While the progressive income tax rates in Minnesota range from 5.35% to 9.85%, those in Mississippi range from 3% to 5%.
In Indiana, for instance, you can anticipate paying $323 in state taxes for $10,000 in debt relief and $646 in state taxes for $20,000 in debt relief.
Some states may also impose flat or progressive county taxes. For instance, Marion County’s income tax in Indiana is 2.02% and is paid by Indianapolis citizens.
It follows that borrowers who receive a $10,000 debt forgiveness will incur an additional $202 in local income tax, and those who receive a $20,000 debt forgiveness will owe an additional $404 in provincial income tax.
As a result, a borrower in Indiana may be responsible for paying up to $1,050 in state and local taxes on forgiven student loan debt.
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