Do I Have to Pay Taxes on Student Loan Debt Forgiveness?
President Biden’s administration successfully forgives student loan debt More than 5 million borrowersdespite recent legal hurdles Save valuable money on education repayment plans and “Plan B” Debt Relief Proposal Have faced it before.
The fate of student loan forgiveness remains unclear — Especially with Trump as president. But if your student loan debt was paid off last year, you may have to pay taxes on the forgiven debt.
Here’s everything you need to know about how student loans affect your tax return.
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Do I need to pay taxes if my student loan debt is forgiven?
It depends on where you live.
Education debt forgiveness is generally taxed as income, so any loan amount that is forgiven is added to your adjusted gross income: If your income is $50,000 and you eliminate $20,000 of loans, your adjusted income for the year is $70,000. However, since one item is included in American Rescue Planfederal taxes on student debt relief will be waived through 2025. As a result, no one will owe federal taxes on forgiven student loans next tax season.
However, you may have to pay state or local taxes on this deduction.
States that tax student loan debt relief
Most states follow the federal tax system, which means they follow the lead of the IRS when it comes to tax regulations. Since the federal government does not currently tax student loan forgiveness, neither will these states.
But 13 states are not following federal guidelines. Of these, five states tax student loan forgiveness: Arkansas, Indiana, mississippi, North Carolina and Wisconsin. Here are the rules and exemptions for each state, along with how much you might owe.
Please note that the calculations below do not include any tax deductions or credits you may be eligible for.
Arkansas
Arkansas’ progressive state income tax ranges from 2% to 3.9%depending on how much money you make each year.
For example, if you earn $50,000 in 2024 and have $10,000 of student loans forgiven, your taxable income totals $60,000. This would put you in the 3.9% tax bracket and mean you’d pay approximately $390 in state taxes on your student debt.
Indiana
Indiana residents are required to pay state and local taxes on forgiven debt. There is no exemption for people participating in the Public Service Loan Forgiveness Program.
Indiana’s flat state tax rate is 3.05%. local tax Varies by county.
If you receive $10,000 in forgiven student loans in 2024, you will pay $305 in state taxes next year. If you live in Indianapolis (Marion County), you also pay a county income tax of 2.02%, which is $202. This would bring the total tax liability on your debt to $507.
mississippi
Mississippi also has it progressive income tax rates. Through 2024, you’ll pay 0% on the first $10,000 of your income, and 4.7% in state income tax on income above that. So if you earn $50,000 in 2024 and receive $10,000 in student loan debt, you will pay a total of $60,000 in taxes. You actually owe $470 in forgiven student loan debt.
North Carolina
If you receive student loan forgiveness and live in North Carolina, you will pay The unified state income tax rate is 4.5% Debt cancellation in 2024. This means you’ll pay approximately $450 in taxes on your loan debt.
There are some exemptions from this tax code: Borrowers in Public Service Loan Forgiveness Program Forgiven loan balances in North Carolina will not be taxed.
Wisconsin
Student loan forgiveness in Wisconsin in 2024 is subject to state taxes. However, there are some exceptions. You will be exempt from this tax if your loan was forgiven under the Public Service Loan Forgiveness Program, Teacher Loan Forgiveness Program, National Health Service Corps Loan Repayment Program, or if you qualify for total and permanent disability.
If you receive any other type of student loan forgiveness, you will need to pay the following fees: 4.40% and 7.65% In state income taxes. If you earned $50,000 in 2024 and received $10,000 in loan forgiveness, you would pay taxes at a rate of 5.3% and owe approximately $530 in student loan taxes. Things may change if you’re married and your spouse’s income pushes you into a lower or higher tax bracket.
How to pay taxes on forgiven student loans
If you receive student loan forgiveness, you will receive Form 1099-C It lists the amount of forgiveness.
“This amount is tax-free on the federal income tax return and in all but five states,” said Mark Kantrowitz, a student loan expert and member of CNET’s Expert Review Board.
For example, if you live in one of the five states that tax student debt relief as income, you’ll need to file that form with your taxes, along with documentation showing the income you earned from your job.
You can do this yourself using the following command IRS Free File Toolbut many taxpayers choose from TurboTax (which is CNET’s top picks 2024 tax return) or CPA.
What if I can’t afford the student debt tax?
Borrowers who are unable to pay the taxes they owe may qualify for an installment plan. This is Agreement with the IRS This allows you to pay your taxes over a longer period of time.
But remember, there are different types of extensions. extension on Archive The deadline gives you more time to file your tax documents but does not extend the payment due date. While an installment plan is a separate agreement, Do Extend payment due dates.
Kantrowitz also noted that if you are deemed insolvent — meaning your debts exceed your assets — you may be able to avoid paying taxes.
If my student loans are forgiven in 2025, will I need to pay federal taxes?
Won’t. Kantrowitz said all student loan cancellations will be federally tax-free through the end of 2025. This means that if your loan is forgiven in 2025, you will not have to pay federal taxes.
Congress may decide to extend the exemption, but as it stands, student debt relief will become federally taxable starting in the 2026 tax year.
