California Could Become First State To Tax Biden’s Student Loan Forgiveness – Will More Follow?

Mandatory Credit: Photo by Chris Kleponis/POOL/EPA-EFE/Shutterstock (13376064d)US President Joe Biden speaks during a reception for the Democratic National Committee at National Harbor, Maryland, USA, 08 September 2022.
Chris Kleponis/POOL/EPA-EFE/Shutterstock / Chris Kleponis/POOL/EPA-EFE/Shutterstock

Californians who benefit from President Joe Biden’s plan to cancel up to $20,000 in student loan debt could be slapped with state taxes on the forgiven amount — despite federal tax exemption

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California’s Franchise Tax Board has not yet formally announced a decision on whether it will levy state income tax on recipients, but it’s indicated that it is possible. 

“We are saying the loan forgiveness would be taxable in California UNLESS this federal student loan debt is repaid or canceled pursuant to 1098e of Title 20 of the United States Code,” a spokesperson for the California Franchise Tax Board told NPR.

As it stands, California taxes debts dismissed through income-based repayment plans based on its state tax code. 

Based on its tax code, it appears that California certainly has the right to tax eligible recipients on their wiped-out student loan debt — but that likely won’t happen. 

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On Friday, California assembly speaker Anthony Rendon tweeted, “Rest assured, one way or another, California will not tax the federal student debt relief.” 

But taxpayers in other states may not be so fortunate. Arkansas, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin all have tax codes that could make the student loan debt canceled under the Biden administration subject to state income tax. 

How states will proceed on this matter is still up in the air, but either way, taxpayers in these states are likely up against some confusing issues come tax season. 

“This is difficult. This is new. People aren’t necessarily expecting it, and especially if you don’t have documentation being sent to you like you would with just about any other form of debt discharge,” Jared Walczak, V.P. of State Projects at the Tax Foundation told NPR News. “It’s putting people at a disadvantage.” 

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Given the implicit complications, we may see these seven states updating or even overhauling their state tax codes in the coming months to clarify who owes what and how much. 

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About the Author

Nicole Spector is a writer, editor, and author based in Los Angeles by way of Brooklyn. Her work has appeared in Vogue, the Atlantic, Vice, and The New Yorker. She's a frequent contributor to NBC News and Publishers Weekly. Her 2013 debut novel, "Fifty Shades of Dorian Gray" received laudatory blurbs from the likes of Fred Armisen and Ken Kalfus, and was published in the US, UK, France, and Russia — though nobody knows whatever happened with the Russian edition! She has an affinity for Twitter.
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