On Top of the $300 Billion Taxpayer Burden, Biden’s Student Loan Forgiveness May Increase Your State Tax Bill – Opinion

Joe Biden made the announcement that the government would forgo student loans up to $10,000 for millions of Americans. This was in addition to his commitment to Penn Wharton Budget Model (PWBM), which based on a 329.1 Billion price tag for the country over 10 year.

The National Taxpayers Union Foundation estimates that this means the taxpayers are responsible for $2,000 And while some may argue the taxpayers won’t actually bear that cost, the NTUF argues that, well actually, they will in some way.

Some might argue that student debt cancellation is borne by taxpayers. However, the cost to cancel student debt would amount to $329 Billion, which is $329 Billion more than the Federal Government had borrowed. It is not returning to the Treasury. The future will see policymakers needing to fill that gap with spending cuts, tax hikes, increased borrowing or a combination of both.

If past is prologue, the Administration and Congress will charge student debt cancellation to the taxpayers’ credit card. A one-time forgiveness is not enough to fix the root causes of student borrowing and education costs for future and current students.

AP Photo/Evan Vucci

The problem, though, isn’t just the taxpayer burden down the road. A lot of Americans do not realize this: Unless their states Treasury Departments modify the rules temporarily, loan forgiveness will still be considered income and subject to tax.

U.S. tax law states that when a loan has been forgiven, the borrower must send in a 1099 Form, showing the forgiven amount. This is considered taxable income, and it will be taxed by the government.

The American Rescue Plan, passed by Congress and signed into law right at the beginning of the Biden Administration’s term, barred the IRS from taxing loan forgiveness through 2025. So Biden’s plan won’t make your federal taxes go up immediately. The same could not apply to your state.

While Biden’s student loan forgiveness won’t trigger higher federal taxes, you may still be on the hook for state levies, said higher education expert Mark Kantrowitz.

Some states automatically conform to federal rules, but others may count the forgiven balance as income, meaning it’s still possible you’ll have a bill. The amount “may be the equivalent of a few student loan payments,” Kantrowitz said.

If you’re unsure, contact a local tax professional for an estimate before filing your state tax return.

You have absolutely nothing to worry about if you live in states with no state income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Many other states will match federal income tax laws to theirs, however they need to confirm that their current rules align with those of the American Rescue Plan.

So, if you don’t live in one of those states, you may want to reach out to your accountant, or call your state’s Treasury Department and see what the rules are going to be for you. And, if you end up having to pay extra in state income taxes, be sure to remember that Joe Biden swore up and down that he wouldn’t be raising your taxes.

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