You Could Be Taxed On Your Canceled Student Loan Debt In These 13 States

On Aug, 24, President Joe Biden announced a student loan cancellation plan that would cancel up to $20,000 in debt for certain borrowers — effectively wiping the slate clean for around 20 million people across the country. However, while the debt relief is tax-free when it comes to federal returns, it may still come with a state tax in certain areas. So, do you have to pay taxes on your canceled student debt? Here’s what you should know about the debts you may still have to pay.

According to the White House, debt relief will be available for individuals earning $125,000 a year or less, or households earning $250,000 a year or less. Additionally, the Biden administration will be offering an additional $10,000 of relief to those who received Pell grants, which means that certain borrowers will be eligible to receive a total of $20,000 in potential debt forgiveness. Benefits will not be counted as taxable income on the federal level due to a provision included in Biden’s January 2021 American Rescue Plan Act (ARPA). However, according to the Tax Foundation, canceled student loan debts may indeed be considered as taxable income in 13 states: Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.

Why, exactly, can states tax canceled student loan debt? While the federal government has no provision that requires states to do so when it comes to Biden’s new plan, state legislatures can interpret federal tax codes, otherwise known as Internal Revenue Codes (IRC), however they see fit for their individual state. In fact, each state has its very own set of provisions, definitions, and modifications to the IRC. So, states can essentially make up their own rules when deciding what counts as “taxable income” and what doesn’t — which means that yes, states can indeed tax student loan debt cancellation as income.

Essentially, lawmakers in those 13 states have decided to “decouple,” or override federal tax laws to define canceled student loan debt as taxable income. And while legislatures in those states may update their statutes when it comes to complying with federal tax codes, the turnaround would have to be quick, as 2023’s tax filing season is right around the corner.

Based on an initial analysis from the Tax Foundation, the tax rates on Biden’s debt forgiveness plan in these 13 states could range anywhere from $307 to $1,000, assuming that only $10,000 of debt has been forgiven. If you’re in one of those states, it may be best to speak to a local tax professional to figure out where you stand with potential taxes on your debt relief.

It’s unclear whether or not state lawmakers will prevent debt cancellation from being taxed as income in certain states, but one thing’s for sure: you’ll be paying taxes on something, regardless of your student debt situation. As Benjamin Franklin once said, “in this world, nothing is certain except death and taxes.”