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What about the state tax treatment of student loan forgiveness?

President Biden recently announced federal student loan forgiveness of up to $20,000 for Pell Grant recipients and up to $10,000 for others who qualify. Generally, indebtedness discharge is taxable on the federal tax return.  However, the American Rescue Plan Act (ARPA) stated that forgiveness of student loan debt between 2021 and 2015 would not be taxed on the federal tax return.

How will states treat student loan forgiveness? Most states conform to federal changes. As of the date of this post, there could be 13 states that tax the amount forgiven: Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.

How it all will work remains to be seen – for example, New York requires an addition to income for the amount discharged under the ARPA. Pennsylvania specified that student loans forgiven will not be taxed when a student works for a time in a specific profession.

We are likely to see states issue guidance on this before year-end.

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