(Bloomberg Law) -- Several states are moving ahead to exempt residents from being taxed on forgiven student loan debt under President Joe Biden’s relief plan, while Mississippi has decided against the exemption.
New York, Pennsylvania, Kentucky, Virginia, Hawaii, and Idaho are the latest states to exempt their residents that qualify under Biden’s plan from state income tax. Others—Arkansas, California, Massachusetts, and South Carolina—are still reviewing whether debt forgiveness will be subject to taxation.
The canceled debt will be subject to income taxes in Mississippi, the state Department of Revenue confirmed.
As debt cancellation is generally considered income, the federal government exempted student loan debt forgiveness between 2021 and 2015 from federally taxable income. But more than a dozen states don’t fully conform to that provision of the American Rescue Plan Act and have the option to collect taxes.
“Our Department is currently reviewing whether debt forgiveness in this scenario—via executive order—is subject to state income tax in Arkansas,” that state’s Department of Finance and Administration said in an email. The agency said it would decide within the next few days.
Nonconforming states would have to issue guidelines or pursue legislative action to prevent residents from ending up paying between $500 and $1,100 in state taxes for the 2022 tax year. However, most legislatures have adjourned for the year.
In Minnesota, a proposal to conform to ARPA’s student loan forgiveness treatment sponsored by Gov. Tim Walz didn’t advance in the legislative session that ended in May.
“If the state does not conform to this federal law, then Minnesota taxpayers who have their student debt discharged will have to add back this amount for Minnesota income tax purposes,” the state Department of Revenue said. The Legislature is scheduled to come back into session in January 2023.
The Wisconsin Department of Revenue said it would address the discrepancy with federal law in its upcoming biennial budget. In California, Gov. Gavin Newsom’s administration is evaluating how quickly, or if, California must act on taxability of the forgiven loans, spokesman Alex Stack said.
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(Updates with information from California in second and final paragraphs.)
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