If you qualify for student loan forgiveness, there’s good news: It won’t result in a federal tax bill. And even though some debtors would still owe state taxes, there might be fewer than anticipated.
According to the American Rescue Plan of 2021 provision making student loan forgiveness federally tax-free through 2025, it relies on if and when states comply with federal tax laws.
The Tax Foundation initially predicted that 13 states may tax student loan forgiveness, but as states gave information over the past week, the organization updated its estimates.
Five states may now be subject to taxation on student loan forgiveness: Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin.
In Massachusetts, tax forgiveness is unlikely, but the state hasn’t formally decided.
“No one wants to be the state taxing student loan forgiveness,” Ethan Miller, a certified financial planner and the owner of Planning for Progress, a company in the Washington, D.C., area that specializes in student loans, said.
Since borrowers aren’t receiving additional revenue to meet any state liabilities, he added, the most recent information may be useful.
“I expect we’ll see at least a few more clarify their position,” Miller added.
Of course, there is still time for adjustments given the state of the policies.
Which states may now impose taxes on student loan forgiveness?
Arkansas: Probably taxed
A representative for the Arkansas Department of Finance and Administration told CNBC that although no formal decision has been made, one might be in the works in the coming days.
However, the Tax Foundation claims that the state doesn’t “significantly” comply to the federal code, which makes it likely that forgiven student debt will be subject to taxation without state action.
Massachusetts: Probably tax-free
State Representative Steve Owens, a Democrat from Massachusetts, stated in a tweet on Wednesday that student debt forgiveness won’t be taxable even though the Massachusetts Department of Revenue hasn’t issued a final decision.
Additionally, according to a different tweet from Owens, the state has already provided guidelines on how to comply with the American Rescue Plan’s exclusion.
Fixing this was one of my priorities this session. We exempted discharges of student loan debt from personal income in the FY2023 budget (Section 31) & @MassRevenue had already issued guidance that the exemption from ARPA flowed down to MA until 2025.https://t.co/vif7XJSfxt— Steve Owens (@VoteSteveOwens) August 31, 2022
Minnesota: It might be taxable
A representative for the Minnesota Department of Revenue told CNBC that a state provision to comply with the American Rescue Plan Act’s exception was not authorized during the most recent session of the state legislature.
“If the state does not conform to this federal law, then Minnesota taxpayers who have their student debt discharged will have to add back this amount for Minnesota income tax purposes,” the spokesperson said.
The forgiveness of student loans will be subject to state taxes, according to the Mississippi Department of Revenue, which confirmed this to CNBC.
North Carolina: Taxable
According to a statement issued by the North Carolina Department of Revenue on Wednesday, forgiven student loans are “currently considered taxable income.” The department is keeping an eye on any modifications to the state’s General Assembly’s legislation, though.
Wisconsin: It might be taxable
According to the Charge Foundation, Wisconsin may tax student loan forgiveness because the state tax code already conformed to federal law before the American Rescue Plan Act. By the time of publication, the Wisconsin Department of Revenue had not responded to a request for comment.