Loan and debt forgiveness, according to the US tax code, is treated as taxable income. The Federal government has decided not to tax any student debt forgiveness, and has issued guidance that states should do the same. But states don’t have to follow that guidance, so Mississippi has decided to treat the forgiven debt as taxable income, and it is possible that other states will do the same.
Now there is no state which has tax rates anywhere close to the federal government, and in Mississippi they have income tax rates ranging from 4-5%, something that is awfully close to, but not technically, a flat tax. This means that if you live in Mississippi and receive the full $20k in forgiveness, you may owe an extra $800 in tax, even if you have no other income.
This could be hard for students still in school and accumulating debt who are not currently earning an income or those who haven’t landed their first job yet. It requires a lot of paperwork and creates a lot of stress to plead cases of financial hardship in order to defer tax burdens, and this could even convince some people who otherwise would have jumped at the chance to have some student loans forgiven, that it would be too stressful to do it at this time.
What makes this even tougher, is that there is a timer on this decision, and the default is to treat it as income. Any state who does nothing will by default be taxing the student loan forgiveness, and simple stalling tactics could cost people in some states upwards of $1,000.
It should be noted that Mississippi did not tax any of the forgiven PPP loans in 2021.
It is still unclear whether this will have an effect on voters, but it feels like a strange weapon to wield against the poorest of voters.
North Carolina has now said that it too will tax the student loan forgiveness as if it were income. In addition, the Tax Foundation is predicting that Arkansas, Minnesota, and Wisconsin will tax student loan forgiveness as well.
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