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There’s excellent news if you happen to’re eligible for student loan forgiveness: It won’t trigger a federal tax bill. And while some should still owe state taxes, it might be fewer borrowers than expected.
It depends upon whether and when states conform to federal tax laws, including the American Rescue Plan of 2021 provision making student loan forgiveness federally tax-free through 2025.
While the Tax Foundation initially estimated that 13 states may tax student loan forgiveness, the organization has revised projections over the past week as states provided updates.
It now projects five states — Arkansas, Minnesota, Mississippi, North Carolina and Wisconsin — may tax student loan forgiveness.
While taxing forgiveness is not likely in Massachusetts, the state hasn’t officially made a determination.
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“Nobody desires to be the state taxing student loan forgiveness,” said Ethan Miller, a licensed financial planner and founding father of Planning for Progress, specializing in student loans within the Washington, D.C., area.
He said the most recent updates could also be helpful since borrowers aren’t receiving extra income to cover potential state liability, he said.
“I expect we’ll see at the very least just a few more make clear their position,” Miller added.
In fact, with policies in flux, there’s still time for changes. Currently, here’s which states may tax student loan forgiveness.
Although the Arkansas Department of Finance and Administration hasn’t issued a proper decision, a determination may arrive in the approaching days, a spokesperson told CNBC.
Nevertheless, the state doesn’t conform to the federal code “in any significant way,” in line with the Tax Foundation, making forgiven student debt prone to be taxable without state motion.
While the Massachusetts Department of Revenue hasn’t made a final determination, state Rep. Steve Owens, a Democrat, on Wednesday said in a tweet that student loan forgiveness won’t be taxable.
A state provision to adapt with the American Rescue Plan Act’s exemption was not approved through the last session of the state legislature, a spokesperson for the Minnesota Department of Revenue told CNBC.
“If the state doesn’t conform to this federal law, then Minnesota taxpayers who’ve their student debt discharged can have so as to add back this amount for Minnesota income tax purposes,” the spokesperson said.
The Mississippi Department of Revenue has confirmed with CNBC that student loan forgiveness might be taxable on the state level.
Student loan forgiveness is “currently considered taxable income,” in line with a press release on Wednesday from the North Carolina Department of Revenue. Nevertheless, the department is monitoring laws changes from the state’s General Assembly.
With the state tax law conforming before the American Rescue Plan Act, it’s possible Wisconsin may tax student loan forgiveness, in line with the Tax Foundation. The Wisconsin Department of Revenue hadn’t responded to a request for comment by press time.