In most cases, when you have a debt forgiven, tax agencies treat them like income. Since President Joe Biden announced he is forgiving student loan debt for many borrowers, there is concern about whether it is taxable.
According to Time, the federal government will not tax the forgiven amount, but some states may. You need to know how your state will handle it when the time comes.
Not at the federal level
The reason why the federal government is not taxing the forgiveness is due to the American Rescue Plan Act. This legislation stated that any forgiveness between 2021 and 2025 is not taxable by the IRS. This means that you do not need to claim it on your taxes as income.
States are not the same
The American Rescue Plan Act does not apply to states. Because of this, they can make their own decisions about taxation on forgiven debts. Six states have tax laws that would require you to treat student loan forgiveness as income, which means it is taxable. The states are Arkansas. Massachusetts, Minnesota, Mississippi, North Carolina and Wisconsin. All other states have decided to waive taxation. These six states have varying tax requirements. Some states may waive a portion of the forgiveness or cap the tax amount on it. Some of them are waiting to see what happens before making a final ruling.
When tax time rolls around, make sure that you pay attention to your student loan forgiveness. Check your state law to see if you are on the hook for claiming it as income and paying taxes on it.