Some Americans could be taxed for thousands of dollars over President Joe Biden's student loan forgiveness package as some states tax forgiven debt as income.
This means that borrowers who are still paying down student loans could owe taxes on as much as $10,000 or even $20,000 that was taken off their bill. In Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin, forgiven student loans will be subject to state income taxes.
Tax on Student Loan Forgiveness
This will be done unless these states change their laws to conform with a federal tax exemption for student loans, according to a tally by the Tax Foundation, a Washington, D.C.-based think tank.
The situation has caused concern for Cathy Newman, a Louisiana State University graduate who just took a job teaching freshman biology at the University of Southern Mississippi in Hattiesburg. She thinks that she could end up owing a few hundred dollars of money that she could have kept had she stayed in Louisiana.
The resident said that she can come up with the case because she has a good job, but noted that she knows of a lot of other borrowers who will find it difficult to manage their finances even with their loans forgiven, as per ABC News.
Newman said, "If they stay in the state, they could end up with a pretty hefty tax burden if things don't change. I won't be happy if I have to do it. I can do it. But a lot of people can't." There are more than 40 million Americans who could see their student loan debt cut or eliminate under Biden's announced forgiveness plan.
The Democratic president is erasing $10,000 in federal student loan debt for individuals with incomes below $125,000 per year, or households that earn less than $250,000. Biden is also canceling an additional $10,000 for those who also used federal Pell Grants to pay for college.
According to the Associated Press, this situation, however, only applies to people whose loans were paid out before July 1. This means that it leaves out current high school seniors and students who will follow them.
Payments for Eliminated Debt
While having $10,000 or $20,000 in loan payments eliminated will be beneficial over the long term to borrowers who qualify, those in the affected states might be required to declare that as income. Furthermore, depending on a state's tax rates, the taxpayer's other income and the deductions and exemptions they're able to claim, could add up to several hundred extra tax dollars that they will owe.
Spokespeople for tax agencies in various states, including Idaho, Kentucky, New York, Pennsylvania, West Virginia, and Virginia, said that their states definitely will not tax student loans forgiven under Biden's plan.
Any relief in states that would tax the forgiven debt will have to come from Legislatures as leaders of the Minnesota Legislature and Democratic Gov. Tim Walz indicated that there is broad support for a fix to the issue.
The situation comes as some people shared their concerns over the seemingly "very tough and confusing time" for college students struggling to get a grip on Biden's student loan forgiveness package, Fox News reported.
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