While federal student loans forgiven under certain circumstances are not subject to federal taxes, some states may impose taxes on this forgiven debt.
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The American Rescue Plan Act (ARPA) exempts specific groups of borrowers from federal taxes on forgiven loans, including those defrauded by colleges or with adjusted payment counts.
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Most states align with the federal exemption and do not tax student loan forgiveness, but a few states have chosen to tax it.
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States that tax student loan forgiveness include Indiana, Mississippi, North Carolina, and Wisconsin, with Arkansas potentially making a decision soon.
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Borrowers in these states should consult with a tax advisor or preparer to understand the implications on their taxes and receive a 1099-C tax form.
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States count the forgiven amount as income, and the tax owed depends on the individual's tax bracket.
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State income tax rates are typically lower than federal rates, making the state tax burden more manageable.
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Certain loan forgiveness programs exempted from federal taxes, such as Public Service Loan Forgiveness (PSLF) and Borrower Defense to Repayment Discharge, are often not taxed by states either.
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Total and Permanent Disability Discharge exemptions from federal taxes may expire in 2025 and need renegotiation.
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After 2025, tax implications for student loan forgiveness may change, depending on whether exemptions are extended or tax laws are altered.
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Borrowers should consider their specific forgiveness program for post-2025 taxation.
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