Normally, federal tax laws treat canceled student loan debt as a taxable event, subject to a couple of exceptions. Under the American Rescue Plan Act of 2021, however, student loan forgiveness is exempt from federal taxation for 2021 through 2025. So, you won't owe federal taxes on the $10,000 (or $20,000 if you went to college on Pell Grants) discharged under the Biden Administration's recent announcement.
Many states follow the federal treatment of student loan discharges and won't include debt forgiveness for state income tax purposes. But you might have to pay taxes if you live in one of the following states: Arkansas, Minnesota, Mississippi, North Carolina, or Wisconsin.
While these states may tax your canceled student loans, they're facing enormous pressure to follow the federal government's example. So, some or all of these states might enact a law in the upcoming weeks or months saying that forgiven student loans are tax-free.
Effective date: August 30, 2022