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Student Loan Forgiveness: Which States Will Tax Your Canceled Debt?

Education Personal Finance Tax Filing Taxes

Updated Oct. 18, 2022



At the end of August 2022, President Biden revealed that borrowers could get up to $10,000 of their federal student loans forgiven. If you received a Pell Grant, a federal grant designed to provide student aid to those from low-income households, you could have up to $20,000 of your federal student loans forgiven.

Biden’s student loan forgiveness plan was a welcome announcement for many borrowers struggling with student loan repayment. But with this announcement came a barrage of questions — the taxability of student loan cancellation among them.

Will I owe federal income tax on student loan forgiveness?

You will not owe federal income tax on any discharged student loans in 2022.

Under usual circumstances, the IRS treats discharged debt as taxable income. However, thanks to the American Rescue Plan of 2021, student loan forgiveness will not be taxed at the federal level through 2025.

Will I owe any state income tax on discharged student loans?

Whether you will owe state income tax on student loan forgiveness depends on what state you live in.

Most states have conformity rules in place that follow federal tax regulations, but some states do not. Non-conforming states have statutes in place, allowing them to decide what is taxable and what isn’t.

It’s up to these non-conforming states to decide whether they want to exempt student loan forgiveness from state taxation or remain on track to treat it as taxable income.

Which states could tax forgiven student loans?

According to the Tax Foundation, as of Sept. 12, 2022, California is the only state in the list below to have confirmed that it intends to treat student loan cancellation as taxable income.

Six other states are also on track to tax discharged student loan debt unless they indicate otherwise in the coming months.

Here’s the complete list of potential states to keep an eye on:

  1. Arkansas
  2. California (confirmed)
  3. Indiana – more info
  4. Minnesota – more info
  5. Mississippi
  6. North Carolina – more info
  7. Wisconsin

The above is subject to change as details of the student loan forgiveness plan are finalized during the next legislative session, so keep checking back for updates.

How much state income tax could I owe on my canceled student debt?

How much state income tax you would owe depends on the amount of student debt you have discharged and your state’s income tax rate. Some states collect a flat tax rate from all residents, while others have different tax brackets depending on your income. The Tax Foundation has a helpful article detailing every state’s individual income tax rates and tax brackets.

When will my student loan forgiveness be taxed (if applicable)?

If you owe any state income tax on federal student loan debt forgiveness, it will be taxed in the year the debt was discharged. For example, if you had $10,000 in student loans forgiven in 2022, you would pay any related income tax when filing your 2022 state income tax return.

TaxAct® offers both federal and state filing. If you choose to e-file with us, we’ll help you determine if you owe any state taxes on canceled student debt. Our tax software will ask you interview questions to determine how much state income tax you owe — plus, we’ll help point you toward any state deductions you may qualify for to help you keep more of your hard-earned money in your pocket.

How do I apply to have my student loans forgiven?

The federal government recently launched a website where eligible borrowers can fill out a “short and simple” application to apply for student debt forgiveness.

The U.S. Department of Education urges borrowers to “apply by mid-November in order to receive relief before the payment pause expires on Dec. 31, 2022.”

 

This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.

 

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