Student Loan Forgiveness: Is it Taxable?
As many are aware, President Biden has announced plans to forgive student loan debt for millions of American taxpayers. Individuals making less than $125,000 and married couples making less than $250,000 may be eligible to have up to $10,000 of their student loans forgiven. This increases to $20,000 of forgiveness if the loans were in the form of a Pell Grant.
While this provides a significant benefit to those that are eligible for this relief, individuals should be aware that they may owe additional taxes on the amounts forgiven.
First the good news…
The American Rescue Plan Act which was passed back in March 2021 already contemplated student loans being forgiven and included a provision which will allow the amounts being forgiven under this program to be excluded from a taxpayer’s federal income.
However, taxpayers should be aware that states do not always follow the federal tax laws and enact their own rules on certain items. This is one such item. Therefore, it will depend on the state you live in as to whether or not this forgiven amount will be taxable for state purposes.
For example, based on the current North Carolina tax laws, North Carolina resident taxpayers who have student loan debt forgiven under this relief will owe taxes on the amount that they have forgiven. This means a NC taxpayer that receives $10,000 of student loan forgiveness under this program in 2022, will owe an additional $499 in taxes when they file their 2022 North Carolina tax return.
While the benefits still far outweigh the tax that may be owed, taxpayers should be aware that, depending on the state they live in, they may see an increase in their state income taxes as a result of this forgiveness.
As always, please don’t hesitate to reach out to your trusted BRC advisor if you have any questions.