Many borrowers are thrilled with President Biden’s student loan forgiveness plan. However, there are some preparing for a possible state tax bill because of it. A handful of states have announced they may tax student loan forgiveness. Optima Tax Relief lists the states that participate in this taxation and explains how to estimate your state tax liability.
Some states have confirmed they will tax student loan forgiveness, including Indiana, Minnesota, Mississippi, and North Carolina. California, Wisconsin and Arkansas remain undecided on the topic. The amount taxed will depend on the amount forgiven as well as the tax rate in your state, whether it’s fixed or graduated.
For example, California residents have graduated tax rates that range from 1% to 12.30%. The forgiven debt will be counted as taxable income and taxes will be owed on the AGI for that year. Other states that have graduated tax rates in 2022 include:
- Arkansas: 2% – 4.9%
- Minnesota: 5.35% – 9.85%
- Wisconsin: 3.54% – 5.3%
The Remaining States That May Tax Student Loan Forgiveness Have Flat Tax Rates In 2022.
- Indiana: 3.23%, plus county taxes
- Mississippi: 5% for taxable income over $10,000
- North Carolina: 4.99%
The best thing residents in these states can do is try to calculate their potential tax bill and then set money aside for it. There are several online resources that can help with this, including state tax calculators. More information should be available on each state’s Department of Revenue website.