Because of the debt relief announced by President Joe Biden in August, Austin Hammond and his wife may be able to buy a home sooner than expected. Keep an eye on
However, Hammond, a 25-year-old nonprofit outreach coordinator in Wisconsin, was surprised to learn that, under current state law, he will have to pay income tax on his $10,000 in debt forgiveness, despite the fact that it is tax-free under federal law.
“I think it would be really disappointing to have this opportunity to help working-class people and then have the state legislature cut into that by taxing something that is supposed to give them a head start and a foot forward,” he said.
Biden’s action will eliminate nearly one-third of Hammond’s $29,000 in federal student loan debt after he graduates from the University of Wisconsin-Oshkosh in 2021. However, he lives in one of a few states where, for the time being, borrowers receiving relief may have to factor in a higher tax bill. Arkansas, California, Indiana, Minnesota, Mississippi, and North Carolina are among the others.
This disparity among states complicates a new program that an estimated 43 million borrowers are attempting to understand, and it may fuel political battles in states where changing the taxability will require Republican cooperation.
Democrats claim they are easing a crushing burden on the far too large number of people who must incur large debts in order to continue their education past high school. Republicans are portraying debt relief as elitist and unfair to plumbers, waitresses, and truck drivers who did not attend college.
Democratic Gov. Tony Evers believes “Wisconsinites who have had their federal student loans forgiven should not be penalized by having to pay more income taxes,” according to communications director Britt Cudaback in an emailed response.
In Minnesota, another state where the relief will be taxed unless the legislature acts, the head of the Senate tax committee stated that nothing will change until a thorough review of the effects is completed and Minnesotans provide feedback.
The issue is beginning to surface for the National Association for the Advancement of Colored People, whose national headquarters are in Baltimore, Md., as more is learned about the debt relief process. The NAACP may fight for change in states where it is a problem, according to Wisdom Cole, the group’s national director of youth and college, who was among those who pushed hardest for the debt relief.
Because of a provision tucked into the American Rescue Plan Act, the $1.9 trillion COVID relief package passed in 2021 without GOP support, Biden’s student loan debt relief is not taxable at the federal level. Democrats lacked the votes to eliminate student debt, but they could exempt any loans forgiven from taxes until 2025.
At the time, there was little debate about the provision. Instead, the focus remained on whether Biden would decide he had the authority to forgive debt without the approval of Congress.
His executive action to erase up to $20,000 in student loan debt is still being challenged in court.
Meanwhile, some states must decide whether to treat the forgiveness as taxable income.
That is not a question for states that automatically align their tax rules with the Internal Revenue Code in order to simplify things for taxpayers and administrators.
However, some states have very different codes, such as Pennsylvania, Mississippi, and Arkansas.
The Pennsylvania Department of Revenue, on the other hand, recently announced that debt forgiveness will not be taxed, though Walczak questioned their reasoning.
According to Lexus Burns, a state revenue department spokesperson, Mississippi’s code considers it taxable income.
After reviewing state income tax law and “this unique situation in which an executive order would cancel a significant amount of student loan debt,” Arkansas is expected to make a decision within days, according to Scott Hardin, spokesman for the Arkansas Department of Finance and Administration.