These 13 States Could Tax You On Your Student Loan Forgiveness – Is Yours One of Them?

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You may have heard the phrase, “There’s no such thing as a free lunch.” Commonly attributed to Paul Mallon, an American political journalist who first used the words in 1942, the phrase was popularized (and colloquialized) to “There ain’t no such thing as a free lunch,” or “TANSTAAFL,” by science fiction author Robert Heinlein in the 1960s.

The expression means that every choice comes with trade-offs. If you receive something free, there may be costs attached later on. It’s a cynical way of viewing life but, in the case of student loan forgiveness, it could prove to be true for taxpayers in certain states. Fortunately, the trade-off is much smaller than the benefit.  

Thirteen states could decide to tax forgiven student loan debt on 2022 tax returns, according to the Tax Foundation. Even though residents in these states aren’t responsible to pay off their student loans, the amount of money forgiven could be considered taxable income by the state.

The states that are considering taxing up to $10,000 in forgiven student loan debt as income, according to a preliminary report from The Tax Foundation, include:

  • Arkansas – $550
  • Hawaii – $1,100
  • Idaho – $600
  • Kentucky – $500
  • Massachusetts – $500
  • Minnesota – $985
  • Mississippi – $500
  • New York – $685 (Calculated for taxpayers below the top marginal rate)
  • Pennsylvania – $307
  • South Carolina – $700
  • Virginia – $575
  • West Virginia – $650
  • Wisconsin – $530 (Calculated for taxpayers below the top marginal rate)

The good news is that, even without changes in legislation by these states, the maximum tax liability residents would accrue is, in all but one case, less than $1,000. The maximum tax liability residents would be expected to pay is listed next to each state on the list above.

Make Your Money Work For You

The Tax Foundation calculated these figures based on the top marginal rate in most cases since many student loan borrowers have already reached the top marginal rates for state taxes. “While this will not be the amount paid by all taxpayers with debt forgiveness, it will apply to many of them,” writes.  

In general, any discharge of indebtedness counts as taxable income at both the federal and state level. Thanks to the American Rescue Plan Act, student loan debt forgiven between 2021 and 2025 is not taxable at the federal level.

If you feel you may be facing increased tax liability due to forgiven student loan debt in 2022, you should speak with a tax accountant now to determine legal and beneficial ways to reduce your tax liability, such as increasing contributions to a pre-tax retirement account.

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