(Headline USA) Borrowers who apply for President Joe Biden’s student loan debt “forgiveness” plan might face an additional income tax in 13 states, according to tax experts.
Biden’s plan would allow borrowers making less than $125,000 per year to qualify for $10,000 in debt relief, and married couples making $250,000 to qualify for $20,000. The plan is supposedly tax-free on federal returns, but some states have laws on the books that may consider the canceled debt as income, according to Jared Walczak, an expert with the Tax Foundation.
These states include Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin.
“Generally speaking, states use the federal tax code as a baseline for how they define taxability,” said Walczak.
But since many states won’t be able to update their tax provisions until the next legislative session, and since canceled debt is considered generally taxable, many borrowers might get slapped with a fee.
“States could come back very early in the next legislative session, update their conformity statute and make it effective immediately,” Walczak added.
However, he said his analysis “should never be construed as tax advice” because states have not yet issued direct guidance on how they plan to treat student debt relief, and advised borrowers who plan to apply for the program to consult their tax advisers before doing so.
“This is not a niche issue that only affects a few people,” Walczak said. “It affects a very large number of people and hopefully, there will be clarity provided on it.”
Biden’s student loan debt “forgiveness” plan has been slammed by financial experts as regressive and burdensome. Even former Obama economics adviser warned the plan will “hurt” almost everybody.
“Student loan relief is not free. It would be paid for,” Jason Furman, the former chairman of Obama’s Council of Economic Advisors, wrote on Twitter.
“Part of it would be paid for by the 87% of Americans who do not benefit but lose out from inflation. Part of it would be paid for by future spending cuts [and] tax increases— with uncertainty about who will bear those costs.”
