These states are waiving state taxes for student loan forgiveness

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It’s been just over a week since President Joe Biden announced that up to $10,000 in federal student loans per borrower — and up to $20,000 for Pell Grant recipients — would be forgiven, freeing up more than 20 million student loan borrowers. debt.

While this was good news for many, there are still more details and next steps for borrowers to consider, including contacting your loan officer to receive a refund for any pandemic-era payments and apply for federal student loan forgiveness.

After some confusion over whether or not states would count the money saved from student loan forgiveness as taxable income, student borrowers in a few other states can also rejoice in the fact that they will no longer have it above their heads. With the exception of two states—Mississippi and North Carolina—that have decided to levy state taxes on federal student loan forgiveness, and several others that have yet to announce their final decision, in most states, additional state taxes will not be required for those whose federal student loans have been forgiven.

Below, Select details how the states in question handle state taxes and federal student loan relief, and some steps you can take to reduce your taxable income before the end of the year.

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Taxes on Canceled Student Loan Debt

Typically, when you have a discharged debt, the IRS treats it as taxable income. Since you didn’t pay off the debt you had but kept the money that would normally have been sent to a debtor, it is considered income, making it taxable.

With student loan relief, taxes work differently. In March 2021, President Joe Biden signed into law the US bailout, which included a student loan forgiveness clause stating that any federal student loans repaid between 2021 and 2025 would not be considered taxable income – in terms of income. federal taxes.

That said, as Eric Bronnenkant, certified financial planner, certified public accountant, and tax manager at Betterment, residents of several states may still be liable for state taxes if their state determines that the money saved through student loan cancellation is taxable income.

It all depends on the concept of compliance – whether or not a state chooses to comply with federal tax regulations or go its own way through laws already in place – and whether or not non-compliant states have time to update. these laws. to comply with new legislation.

“[37 states] choose to comply with the federal tax system, comply with specific federal legislation, or create your own specific exceptions and exclusions,” Bronnenkant said. “There are 13 states where debt forgiveness can be considered taxable income.

According to Bronnenkant, these states can adjust this for their respective residents through “legislative changes or administrative decisions by state tax authorities.”

Changes will take place and more information will be released over the coming weeks and months, so in the meantime, keep an eye on your state’s tax authority website. Noting that this is an ongoing situation and that the following information was accurate as of September 2, 2022, here is where states that are not federal tax code compliant stand on collecting state revenue on student loan forgiveness:

All States not listed above comply with the federal tax code, so residents will not be subject to state income tax on student loan forgiveness. According to the Tax Foundation, Arkansas, Minnesota and Wisconsin appear to be “on track” to making student loan forgiveness taxable income.

If you’re still unsure whether you’ll have to pay taxes on the student loan forgiveness you received, contact your favorite accountant or a trusted tax service.

How to lower your tax bill

Whether or not your student loan forgiveness ends up being considered taxable income, there are still plenty of ways to lower your level of taxable income before the end of the year, while helping you invest for the future.

If you currently have private student loans, which are not eligible for forgiveness or suspension of payments, you can still deduct up to $2,500 of interest paid from your taxable income. Also, to save more money on interest payments, consider refinance your private student loans with a lender like SoFi Student Loan Refinancing or Earnest Student Loan Refinancing.

SoFi Student Loan Refinance

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans

  • Types of loan

  • Variable rates (APR)

    From 2.49% (rates include 0.25% autopay discount)

  • Fixed rates (APR)

    From 3.99% (rates include 0.25% autopay discount)

  • Loan conditions

  • Loan amounts

    From $5,000; more than $10,000 for residential medical/dental loans

  • Minimum credit score

  • Minimum income

  • Authorize a co-signer

Serious student loan refinancing

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, Private, Graduate, and Undergraduate Loans

  • Types of loan

  • Variable rates (APR)

    From 1.89% (rates include 0.25% autopay discount)

  • Fixed rates (APR)

    From 3.49% (rates include a 0.25% automatic payment discount)

  • Loan conditions

    Flexible terms between 5 and 20 years

  • Loan amounts

    A minimum of $5,000, up to $500,000 (California residents must apply for a refinance of $10,000 or more)

  • Minimum credit score

  • Minimum income

  • Authorize a co-signer

You can also contribute more to your 401(k) retirement plan or traditional IRA, which will reduce your annual taxable income and allow your money to grow over time. A few of our favorite IRA brokerages are:

Loyalty investments

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    Deposit and minimum balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go account, but a minimum balance of $10 for the robo-advisor to start investing. Minimum balance of $25,000 for personalized planning and advice from Fidelity

  • Costs

    Fees may vary depending on the investment vehicle selected. No commission fees for trades in stocks, ETFs, options and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go is free for balances under $10,000 (afterwards, $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity’s personalized planning and advice has a 0.50% advisory fee.

  • Prime

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    Robo-advisor: Fidelity Go® and Fidelity® Personalized planning and advice IRA: Fidelity Investments Traditional IRAs, Roths and Rollovers Brokerage and negotiation: Fidelity investment trading Other: Fidelity Investments 529 Education savings; Loyalty HSA®

  • Investment opportunities

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

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    Comprehensive tools and industry-leading in-depth research from over 20 independent vendors

Avant-garde

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    Deposit and minimum balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguard account, but a minimum deposit of $1,000 to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires a minimum of $3,000 to sign up

  • Costs

    Fees may vary depending on the investment vehicle selected. No commission fees for stock and ETF transactions; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts, unless you opt for paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% advisory fee (after 90 days)

  • Prime

  • Investment vehicles

    Robo-advisor: Vanguard® Digital Advisor IRA: Vanguard Traditional, Roth, Rollover, Spouse and SEP IRA Brokerage and negotiation: Avant-garde trade Other: Plan Vanguard 529

  • Investment opportunities

    Stocks, bonds, mutual funds, CDs, ETFs and options

  • Educational resources

    retirement planning tools

Then you can contribute more money to a health savings account, which would save you pre-tax money for eligible medical expenses, or invest the funds in a brokerage account within that account. savings plan, which would help reduce your taxable income for the year. Note, however, that you will need to have a high-deductible health plan in order to enroll in a health savings account.

Finally, if you have purchased stocks that are not performing well, you can consider selling them and reversing the loss. This is called tax loss harvesting, which basically means that you will only have to pay tax on the net profit you have made from your investments.

At the end of the line

While there are still plenty of details we don’t yet know about student loan forgiveness, your best bet in the meantime is to sit back and start creating your post-forgiveness financial plan, which may include build your emergency fund, pay off any high-interest debt, or open an IRA to help you invest for your retirement. Either way, it’s a good idea to have a plan in place to avoid spending the windfall elsewhere.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.

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