President Biden announced a new student loan forgiveness plan earlier this year that could impact millions of Americans struggling to pay off their student loans.
Eligible recipients may have up to $20,000 in student loan debt canceled, saving them thousands of dollars in interest and potentially absolving their debt altogether.
However, residents in a few states who receive this forgiveness may face a higher tax bill. So, before you apply for student loan forgiveness, tax debt relief, or another financial move, it is essential to know the potential implications.
Several states are considering taxing student loan forgiveness, which has traditionally been considered tax-free. This controversial move could significantly impact students struggling to pay off their loans.
If you have questions about this, it is understandable. The laws for taxes are complex, and even experts may question why a state taxes the forgiveness of debt. Essentially, it all comes down to whether or not a state considers debt forgiveness as a source of income.
The federal government has announced that the forgiveness of student loans will be exempt from federal income taxes, thanks to the American Rescue Plan. Most states have announced they will follow suit and exempt the forgiveness from state income taxes.
However, a few states have announced that they will treat, or plan to treat, canceled debt as taxable income.
While getting taxed on student loan forgiveness might feel frustrating, there is some good news. For one, the amount you’ll owe isn’t that high; you’ll most likely need to pay a one-time amount of around $500.
Reach out to your accountant or tax specialist if you’re still worried about the taxes you’ll owe. They can help you navigate these waters and minimize any potential penalties.
Also, participate in the legislative process by reaching out to your elected officials to let them know how their decisions affect you, a constituent. The more they hear from voters, the more they’ll have to pay attention to the ramifications of these decisions, especially come election time. Many thought the 2022 midterms would be a “red wave” of new Republican elected officials, but student loan debt relief became one of the key issues that prevented the GOP from grabbing too much power.
If you live in one of the states listed, it’s essential to know that student loan forgiveness may be taxable. This could significantly impact students struggling to pay off their loans, so stay informed and speak up if you have any questions. Tax professionals can help navigate these waters, and you can also reach out to your elected officials to let them know how you feel.