Fact Finders: Taxed on student loan forgiveness?

SPRINGFIELD, Mo. (KY3) - Some states plan to tax any student debt relief. Indiana intends to treat any forgiveness as income and tax it. So, we’re getting several questions from residents in Missouri and Arkansas like this one; “Is it true I’ll be taxed on student loan forgiveness?”

Update: The application for student loan debt relief is available. Apply for Federal Student Loan Debt Relief here.

President Joe Biden’s plan would erase $10,000 in federal student loan debt for individuals. That’s if your income is below $125,000 a year or you’re in a household making less than $250,000. If you had a Federal Pell Grant, you could get an additional $10,000 in forgiveness.

The Tax Foundation has a list of seven states that could wind up taxing debt relief, and Arkansas is one of those states. So, we interviewed Scott Hardin of the Arkansas Department of Finance. And it’s complicated. You may have to pay taxes on the forgiveness.

“The general answer is that relief of debt is taxable income in Arkansas,” Hardin explained. “However, I would say that the state legislature does have the ability to change that. So, if they’re getting together in January of next year for the next session, they can take action and exempt that income or that forgiveness from being taxable in the state. And that wouldn’t necessarily be surprising.”

In a written statement online, Arkansas’ Department of Finance added, “The forgiveness of a debt is generally included in a taxpayer’s gross income. However, the Arkansas General Assembly and Governor Asa Hutchison took action to exempt unemployment payments from state income tax for two years. Additionally, PPP loans are not subject to state income tax because of legislation. The General Assembly meets in January and may take similar action to exempt this student debt forgiveness. It would be inaccurate to report that student loan forgiveness will be taxable in Arkansas as we won’t be certain until the legislative session is complete. The details of the loan forgiveness plan are finalized and announced by the U.S. Department of Education.”

If you’re in Arkansas and you’re a planner, and you don’t want to wait on lawmakers, you could set aside $200 to $500 just in case.

In Missouri, Anne Marie Moy of The Missouri Department of Revenue told us in a statement, “The state of Missouri will not tax the student loan debt forgiveness. The IRS has already announced that loan forgiveness will not be taxable at the federal level. And because the Missouri adjusted gross income is based on the federal adjusted gross income, it is not taxable in Missouri.”

Drury Associate Professor of Accounting Dr. Tiffany Cossey tells us you should ask questions about taxes in any situation like this.

“Whenever you have something like this, like debt forgiveness, or even when you get a big chunk of actual income, the best time to plan for it for taxes is now. And so, if you receive income, the best time to put money away for taxes you’ll have to pay later is now. And if you have debt forgiveness, that could be taxable, the best time to plan for that is now, not wait until you file your tax return and hope you have enough money to cover it,” explained Cossey.

Circling back to the question, “Is it true I’ll be taxed on student loan forgiveness?”

If you live in Missouri, that is not true. At this point, you will not be taxed on student loan forgiveness.

In Arkansas, the answer is different. It’s a maybe. You may be taxed on the forgiveness. But, based on past action, it’s expected the legislature will act in January to exempt the debt forgiveness from taxes. So, stay tuned.

If you have something you want us to investigate, email us at factfinders@ky3.com

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