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If you’re one of the millions of Americans who expect student loan forgiveness, you won’t owe federal taxes. But that doesn’t mean you’re off the hook at the state level.
Indiana is the latest to confirm that the rebate will trigger state income taxes, and some borrowers may owe county levies in addition to state income tax.
“Because this law is clearly defined, there is no need for additional administrative rules,” said a spokesperson for the Indiana Department of Revenue. “Any legislative modification must come from the general assembly.”
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A provision of the 2021 U.S. bailout makes student loan forgiveness federally tax-free through 2025, and state income taxes depend on state compliance with federal tax laws.
Last week, the Mississippi Department of Revenue confirmed to CNBC that the student loan forgiveness will be taxable, and the North Carolina Department of Revenue shared the same in a press release.
Of course, with changing state laws, there is always the possibility that these tax policies, among others, could change.
Taxation is possible in other states
In addition to Indiana, Mississippi and North Carolina, state-level taxation may also be possible in Arkansas, California, Minnesota and Wisconsin, according to preliminary analysis by the Tax Foundation.
The organization initially estimated that 13 states could mandate student loan forgiveness and revised the projections with updates.
It now provides that seven states – Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin – could impose student loan forgiveness.
Taxing the pardon is not likely in Massachusetts, but the state has not shared an official decision.
Currently, here is a breakdown of the status in pending states.
Although the Arkansas Department of Finance and Administration has not issued a formal decision, a decision could come in the coming days, a spokesperson told CNBC.
However, the state is not complying with the federal code “in a meaningful way,” according to the Tax Foundation, which makes canceled student debt likely to be taxable without state action.
California may also tax student loan forgiveness, depending on how the Department of Education administers the program, a spokesperson for the state’s Franchise Tax Board told CNBC.
Although the Massachusetts Department of Revenue has not made a final decision, state Rep. Steve Owens, a Democrat, said in a tweet that the student loan forgiveness will not be taxable.
Additionally, the state has already issued guidance on compliance excluding the U.S. bailout, Owens said in a separate tweet.
The Mississippi Department of Revenue confirmed to CNBC that the student loan forgiveness will be taxable at the state level.
Student loan forgiveness is “currently considered taxable income,” according to a North Carolina Department of Revenue press release. However, the department monitors legislative changes made by the state General Assembly.
With state tax laws consistent with the American Rescue Plan Act, Wisconsin may tax student loan forgiveness, according to the Tax Foundation.
Tax-free rebate will require legislative change and action by the state legislature, a spokesperson for the Wisconsin Department of Revenue told CNBC.
“We will certainly address this discrepancy with federal law in our next biennial budget request to ensure that Wisconsin taxpayers do not face penalties and increased taxes for canceling their loans,” they said. they stated.