Recently, the Biden administration outlined a plan to forgive up to $10,000 of student loan debt for individuals with federal student loan debt, and up to $20,000 in relief for individuals that were Pell Grant recipients.
Individuals earning $125,000 ($250,000 for joint filers) or less a year are eligible to receive this relief.
Normally, debt forgiveness is taxable income at both the federal and state level, but the American Rescue Plan Act of 2021 provided an exemption from including student loan debt in federal income through 2025. While most states conform to the federal treatment under the American Rescue Plan, there are a handful of states that will potentially subject the forgiveness to state income tax. It was initially reported that Kentucky was among the states that would subject the forgiveness to state tax, but in response to those reports Jill Midkiff, the director of communications for the Kentucky Finance & Administration Cabinet, clarified that "Kentuckians eligible for federal student loan debt forgiveness will not pay state income tax on savings realized under the Biden-Harris Administration's Student Debt Relief plan." This is a direct result of changes adopted by the Kentucky Legislature in its last session adopting the language under matching the state's tax policy to the federal government's.
According to the Tax Foundation's analysis, there are still 5 states that have yet to indicate changes to follow the federal tax treatment of the forgiveness - Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin.
As always, if you have any questions about how this applies to your specific situation, please consult with your Rudler, PSC advisor at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This e-Tip is presented by James Ray, CPA.
If you would like to discuss your particular situation, contact James at 859-331-1717.
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