Widespread federal student loan forgiveness is currently on hold while a federal appeals court rules. But if debt relief is approved, will you still owe taxes in 2023?
You won’t have to pay federal taxes on any forgiven student debt until 2025 because of a provision concealed in the $1.9 trillion American Rescue Act COVID relief package, but you might have to pay state and local taxes in the future.
Is Student Loan Forgiveness Taxable?
Your tax obligation is the same whether you receive forgiveness through the Public Service Loan Forgiveness program, the Federal Student Loan Cancellation Plan, or another scheme.
Despite a temporary suspension of federal taxes on forgiven student debt through 2025, forgiven school loan balances are normally subject to income tax. It follows that this sum will be included in your adjusted gross income if you receive student debt forgiveness, the amount you made last year minus any eligible tax deductions.
Therefore, your income would be adjusted to $70,000 for the year if you earn $50,000 a year and qualify for $20,000 in debt relief. States and local governments also tax student loan forgiveness as income.
On forgiven student loan balances, the majority of states won’t charge taxes, but a few will. We currently know that North Carolina, Mississippi, Minnesota, Indiana, and Minnesota all intend to tax student debts that have been forgiven.
In addition, Wisconsin and Arkansas may follow suit while they haven’t yet announced their tax reform initiatives.
READ MORE: Student Loan Forgiveness: There’s a Way To Cancel Your Debt Within 2 Weeks
State That Doesn’t Tax Student Debt
READ MORE: Received a Student Loan Forgiveness Letter? Here’s What’s Next You Should Do!
There are also 28 states and Washington, DC that either do not have an income tax, in which case forgave student loan debt would not be taxed, or that automatically follow federal law, in which case this canceled debt would not be taxed. These comprise:
- Alaska
- Connecticut
- Delaware
- Florida
- Illinois
- Iowa
- Kansas
- Louisiana
- Maryland
- Massachusetts
- Michigan
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Mexico
- New York
- Ohio
- Oklahoma
- Rhode Island
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Washington
- Washington, DC
- Wyoming
Other states, such as Hawaii, which do not automatically comply with the federal rule, recently declared that forgiven student loan debt would not be subject to state taxation.
The states of Virginia, Idaho, New York, West Virginia, Pennsylvania, and Kentucky also announced they would not tax borrowers on forgiven student debt, according to spokespeople for those governments.