‘No one wants to be the state taxing student loan forgiveness.’ Here’s where borrowers may see a bill

There’s good news if you’re eligible for student loan forgiveness: It won’t trigger a federal tax bill. And while some may still owe state taxes, it may be fewer borrowers than expected.

It depends on 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 isn’t likely in Massachusetts, the state hasn’t officially made a determination.

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“No one wants to be the state taxing student loan forgiveness,” said Ethan Miller, a certified financial planner and founder of Planning for Progress, specializing in student loans in the Washington, D.C., area.

He said the latest updates may be helpful since borrowers aren’t receiving extra income to cover potential state liability, he said.

“I expect we’ll see at least a few more clarify their position,” Miller added.

Of course, 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 formal decision, a determination may arrive in the coming days, a spokesperson told CNBC.

However, the state doesn’t conform to the federal code “in any significant way,” according to the Tax Foundation, making forgiven student debt likely to be taxable without state action.

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.

What’s more, the state has already issued guidance on conforming to the American Rescue Plan’s exclusion, Owens said in a separate tweet.  

A state provision to conform with the American Rescue Plan Act’s exemption was not approved during the last session of the state legislature, a spokesperson for the Minnesota Department of Revenue told CNBC.  

“If the state does not conform to this federal law, then Minnesota taxpayers who have their student debt discharged will have 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 will be taxable at the state level.

Student loan forgiveness is “currently considered taxable income,” according to a press release on Wednesday from the North Carolina Department of Revenue. However, the department is monitoring legislation 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, according to the Tax Foundation. The Wisconsin Department of Revenue hadn’t responded to a request for comment by press time.