Do you have to pay taxes on student loan forgiveness? Yes, if you live in these 7 states

President Joe Biden's executive action to erase up to $20,000 in student loan debt has caused some confusion over whether borrowers will have to pay state taxes on their forgiven debt. 

While many states automatically match their tax rules with the Internal Revenue Code, others will have to decide whether or not to make changes to allow people to avoid these taxes. 

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Why some people might have to pay taxes on student loan forgiveness

Borrowers will not owe federal taxes on student debt relief because of a provision tucked into the American Rescue Plan Act in 2021. It also exempts any loans that are forgiven through 2025.

But because not all states follow the federal tax code, some student debt forgiveness could face state taxes.

Some states have already taken legislative action to exempt debt forgiveness from taxes, and others could do so in the coming weeks and months. 

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Which states may tax student loan forgiveness?

The following states could tax debt forgiveness under current laws, according to the nonprofit Tax Foundation. 

Arkansas: The state tax code is silent on the treatment of student loan debt forgiveness, so the ordinary rule that a discharge of indebtedness constitutes taxable income should prevail absent state action, according to the Tax Foundation.

California: The Tax Foundation said California has confirmed that it will tax student loan debt discharge under current law. An existing law exempting student loans canceled pursuant to income-based repayment programs will not apply.

Indiana: The Indiana Department of Revenue confirmed in an email to the Associated Press this week that residents are required to list their forgiven loans as taxable income per Indiana law.

Minnesota: State law currently lacks any provision to exclude student loan debt cancellation from income, per the Tax Foundation.

Mississippi: State law considered discharged debt taxable income and is in line to tax student loan debt forgiveness, according to the Tax Foundation. 

North Carolina: A state statute taxes student loan debt forgiveness, according to the Tax Foundation. 

Wisconsin: State tax law would include debt forgiveness as taxable income. “Wisconsinites who have their student loans forgiven by the federal government shouldn't be penalized by having to pay more income taxes,” a spokesperson for Democratic Gov. Tony Evers said in an emailed response to Paste BN. 

How to report debt forgiveness to the IRS

Borrowers benefiting from tax forgiveness might not immediately think of the $10,000 being forgiven as income, since they are not getting money deposited into their bank account.

But in states that tax this forgiveness, it will be considered taxable income and will need to be reported under the “other income” section of your tax return. 

“It’s a confusing program to start with,” said Mark Steber, chief tax information officer at Jackson Hewitt. “If you're in any one of those situations where it's not perfectly clear, get some help.”

Maureen Groppe, Paste BN, contributed to this report. 

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