On August 24, 2022, the Biden Administration announced it would cancel $10,000 in federal student loan debt ($20,000 if you went to college on Pell Grants) for those earning less than $125,000 per year.
In most cases, federal laws treat canceled student loan debt as a taxable event for the borrower. But last year's American Rescue Plan Act included a provision that ensures borrowers won't get stuck with a big tax bill from the federal government after their student loans are forgiven.
However, you might still have to pay state taxes on the canceled amount, depending on where you live.
Again, federal laws usually treat canceled student loan debt as a taxable event for the borrower, subject to a couple of exceptions, like Public Service Loan Forgiveness and disability discharges (until January 1, 2026). In most cases, student loan forgiveness, such as under an income-driven repayment plan, can result in a significant tax liability. Depending on your situation and how much debt was canceled, the taxable income could add hundreds or thousands of dollars to your tax bill.
However, the American Rescue Plan Act of 2021, which President Joe Biden signed into law on March 11, 2021, makes student debt cancellation tax-free at the federal level until January 1, 2026. (See § 9675.) So, from 2021 through 2025, forgiven student loans won't be included as part of your gross income for federal tax purposes.
Most states exclude debt forgiveness from state income tax. But not all.
Last week, the Tax Foundation published a report that said 13 states could potentially tax student loan debt cancellation. However, the list was based on older tax policies in certain states. And some states, such as New York and Pennsylvania, have since said that student loan cancellation won't count as taxable income. Also, the Massachusetts Department of Revenue said it doesn't expect canceled federal student loans to be taxable.
Now, according to the Tax Foundation, just the following states appear to be planning on taxing student loan debt cancellation:
So, if you live in one of these states and have had some or all of your student loan debt canceled, you might have to pay state taxes on the forgiven amount.
But keep in mind these states could pass laws in the upcoming weeks or months to exclude those who received discharges of their federal student loans from having to pay taxes on canceled amounts.
Effective date: August 30, 2022