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Residents in these 13 states could pay taxes on their student loan relief

by Jared Gans - 08/26/22 4:07 PM ET

Residents of 13 states who receive debt forgiveness from the federal government for their student loans may need to pay some state taxes on their forgiven amount, according to an analysis by the think tank Tax Foundation.

Jared Walczak, the vice president of state projects for the Center for State Tax Policy at the think tank, said in a blog post on Thursday that loan forgiveness is generally considered to be equivalent to income and is therefore taxable.

Walczak said that the American Rescue Plan, the $1.9 trillion package that President Biden signed into law in March 2021, exempts the forgiveness of student loan debt from 2021 to 2025 from federal income taxes.

States that follow the federal government’s lead will also exclude debt forgiveness, but not all states do.

Biden announced on Wednesday that the federal government would forgive up to $10,000 in student loans for individuals making less than $125,000 per year and up to $20,000 for those who received a Pell Grant, meant for students with the largest financial need.

The states where residents may need to pay taxes on the forgiven debt are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin.

Walczak also calculated the highest rates that anyone could potentially pay in each of these states for having $10,000 forgiven.

All of these states could require residents to pay several hundred dollars in state taxes on the up to $10,000 in forgiven debt, according to Walczak. Hawaii residents could potentially have the highest tax liability at $1,100.

The taxes would be higher for residents who received $20,000 in forgiveness.

Walczak said states will likely issue guidance in the coming weeks and months on how to treat the forgiven debt.

He told Bloomberg that states will need to act with “some urgency” if they plan to make changes to their tax laws ahead of the debt forgiveness going into effect.