Student loan borrowers won’t have to worry about paying state taxes until 2025, and that sounds great. But, some states will require you to pay state taxes by recognizing them as income.
The answer to whether you will owe state taxes because of student loan forgiveness could depend on where you live. That’s because there are reportedly at least twelve states whose laws regarding the tax treatment of forgiven debt do not conform to the federal government’s current stance on student loan relief. As a result, it’s important to have information about those states, and to know what state tax liability for student loan relief could mean for you.
While you won’t be taxed at the federal level for student loan debt cancellation, the Tax Foundation has reported that there are some states that could tax the amount of student loan forgiveness you receive. Those states include Arkansas, Idaho, Kentucky, Massachusetts, Minnesota, and Mississippi. New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin round out the list.
But there are other states whose existing statutes do not conform to the federal tax treatment in ARPA. And because broad student loan relief was just announced, those states may not have time (before some borrowers receive student loan forgiveness), to enact conforming legislation.
Well, the Tax Foundation’s analysis shows that tax liability for student loan forgiveness in those states could range from a little over $300 to as much as $1,100. So, if you live in Virginia for example, the maximum amount of state tax liability would be $575. However, that calculation assumes that you are eligible for the full $10,000 of loan forgiveness for individuals with income under $125,000 a year. And if you are a Pell Grant recipient in one of the twelve states, and are eligible for up to $20,000 in student loan relief under President Biden’s plan, your state tax liability could be higher.
At this point, there’s a lot of guidance that needs to be issued on how student loan forgiveness will work. That will be important at both federal and state levels. But if you live in one of the nine states that have no income taxes, you don’t have to worry about student loan forgiveness being treated as income on your state tax return.
However, if you live in one of the twelve states that could tax student loan forgiveness, you will want to stay tuned to any guidance or information that is made available on the issue. That guidance could help you know whether student loan debt relief will affect your state taxable income—or your next tax bill.
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