Home Debt Borrowers whose student loans were forgiven in 2023 may owe state taxes

Borrowers whose student loans were forgiven in 2023 may owe state taxes

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President Biden has forgiven more than $136 billion in student loan debt for over 3.7 million borrowers.

The debt relief was under multiple programs: public service loan forgiveness (PSLF) program, income-driven repayment (IDR) account adjustment, disability discharges, and borrower’s defense discharge.

Although borrowers forgiven under the PSLF program are tax-exempt and do not have to pay taxes on debt forgiven, other borrowers who received loan cancellation or discharge are subject to taxes.

When a debt is canceled or forgiven, the Internal Revenue Service requires the debtor to report the canceled debt as ordinary income for any amount over $600.

However, according to the Tax Foundation, a provision in the American Rescue Plan Act (ARPA) of 2021 temporarily exempted student loan forgiveness under IDR plans from federal taxation through 2025.

“Student loans that are forgiven after Dec. 31, 2020, and before Jan. 1, 2026, will not be taxed on a federal return, but for state income tax, there are some exceptions,” Kathy Pickering, chief tax officer at H&R Block, told Yahoo Finance.

Even though federal taxes are exempt through 2025, borrowers may be on the hook for state taxes if their state hasn’t adopted the provision of the American Rescue Plan to waive taxes on forgiven student loan debt.

Read more: Will I be taxed on student loan forgiveness?

State tax liability on forgiven student loan debt

States have their own rules regarding the taxation of forgiven student loans, Karla Dennis, an enrolled agent at Karla Dennis & Associates, told Yahoo Finance. Some states follow federal tax law, but others treat forgiven loans as taxable income.

“Taxpayers must check the specific regulations of their state to prevent unreported income,” Dennis said.

Some states do not tax income or have a limited tax, so if you live in Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — you will not be subject to state taxes on forgiven student loan debt.

Arkansas, Indiana, Mississippi, North Carolina, and Wisconsin are not conforming with the federal tax exemption on student loan forgiveness, so borrowers who had loans forgiven living in those states may be subject to state taxes.

“This is subject to change especially since we are entering legislative sessions for most states, and taxpayers should check the rules for their state to ensure there haven’t been any changes,” Pickering said.

Borrowers may not receive 1099-C forms from their student loan service providers stating the amount of student loan debt that has been discharged. However, if they live in a state that is not conforming to the federal exemption, they may need it.

Full coverage: Taxes 2024 — Everything you need to file your taxes on time

Tax Form 1099-MISC on a white background.

Credit: Getty Images (Jae Young Ju via Getty Images)

Due to “gross servicing failures” by many loan servicers, it may take a while to receive 1099-C documentation from them if required.

Taxpayers should consult with their tax professional to see if they are required to pay state taxes on any student loan debt forgiven last year and what documentation, if any, is required from their loan service provider.

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on X @writesronda

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