Six states are on track to tax Biden’s student loan debt forgiveness.
Nonpartisan think tank the Tax Foundation said some states are likely to end up blocking tax plans.
Borrowers could be left with an average bill of $500 for the student loan relief if it is taxed.
Six states are set to tax Biden’s student loan debt forgiveness, but one expert says the number is likely to fall.
Historically, any sort of debt forgiveness or debt cancellation at the state or federal level has been considered taxable income. But under the American Rescue Plan act any student loan debt forgiveness between 2021 and 2025 will not attract federal tax.
The debt relief is still triggering some states’ tax codes because not all conform to the Internal Revenue Code (IRC) in the same way.
“Most states follow the federal tax code to a significant degree,” Jared Walczak of nonpartisan think tank the Tax Foundation told Insider.
But while most do so with rolling conformity — where if a change is made to the Internal Revenue Code it is followed automatically — some have fixed-date conformity, he said.
This is where most of the state-by-state deviation on taxing student loan forgiveness stems from.
Walczak said that the only states that had actively made a decision about student debt and decoupled from the American Rescue Plan were Indiana and North Carolina. However, the Governor of North Carolina, Roy Cooper, has called for the tax to be waived.
Plans by states including Arkansas, Minnesota, Mississippi, Wisconsin, and California to tax the loans were mainly due to legacy issues, Walczak said. He expected most to amend their tax codes rather than leave residents with an extra bill.
“It’s a list that’s only going to get smaller, not larger at this point,” Walczak said.
“No state has taken any sort of action since the announcement of student debt cancellation to affirmatively tax it,” he said. “Instead, we’ve had states largely trying to change the treatment to avoid taxing it. I’ve heard lawmakers in Arkansas, Mississippi, Minnesota, California, and Wisconsin, all talk about the possibility of amending the law.”
California, for example, is more likely to adopt a provision conforming directly to the treatment of student loan debt under the IRC than allow the relief to be taxed.
“California is an interesting state,” said Walczak. “Officials are hanging on to the thin read that they don’t know whether it’s taxable or not.”
Walczak said …read more
Source:: Business Insider