President Biden has forgiven more than $136 billion in student loan debt for more than 3.7 million borrowers.
Debt relief was provided under multiple programs, including the Public Service Loan Forgiveness (PSLF) Program, Income-Driven Repayment (IDR) Account Adjustment, Disability Waiver, and Borrower Defense Waiver.
Borrowers who are forgiven under the PSLF program are tax exempt and do not have to pay taxes on the forgiven debt, while other borrowers whose loans are canceled or forgiven are subject to taxes.
When a debt is canceled or discharged, the Internal Revenue Service requires the debtor to report the canceled debt as ordinary income for amounts exceeding $600.
However, according to the Tax Foundation, provisions of the American Rescue Plan Act of 2021 (ARPA) temporarily exempted student loan forgiveness under IDR plans from federal taxation until 2025.
“Student loans forgiven after December 31, 2020 and before January 1, 2026 will not be taxed on your federal return, but there are some exceptions for state income taxes,” H&R's top Tax Director Kathy Pickering said. Block told Yahoo Finance.
Federal taxes are waived until 2025, but borrowers could be hit with state taxes if states don't adopt provisions of the American Rescue Plan that waive taxes on forgiven student loan debt.
read more: Is there a tax on student loan forgiveness?
State tax liability for forgiven student loan debt
Each state has its own rules regarding the taxation of forgiven student loans, Carla Dennis, an enrolled agent with Carla Dennis & Associates, tells Yahoo Finance. Some states follow federal tax law, while others treat forgiven loans as taxable income.
“Taxpayers should check their state's specific regulations to avoid underreporting their income,” Dennis said.
Some states don't tax your income or have limited taxes, so if you live in Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, you can earn money on your forgiven student loans. There are no state taxes due. debt.
Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin do not comply with the federal tax exemption for student loan forgiveness, so borrowers who live in these states and receive loan forgiveness may be subject to state taxes. There is sex.
“This is subject to change, especially as most states are about to convene their legislative sessions, and taxpayers should check their state's rules for changes,” Pickering said. he said.
Borrowers will not receive a 1099-C form from their student loan servicer stating the amount of student loan debt that has been forgiven. However, if you live in a state that does not comply with federal exemptions, you may need an exemption.
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Due to “gross servicing failures” by many loan servicers, it may take some time to receive your 1099-C document from your servicer, if needed.
Taxpayers should consult a tax professional to determine whether they need to pay state taxes on student loan debt that was forgiven last year and what documentation, if any, is required from their loan servicer. is needed.
Rhonda is Yahoo Finance's senior personal finance reporter and an attorney with experience in law, insurance, education, and government. Follow her on X @writesronda