Are you getting student loan forgiveness? You might be on the hook for California taxes

Millions of people will soon benefit from President Joe Biden’s student debt relief plan, though it is unclear if Californians will be taxed on the relief funds.

The one-time debt forgiveness of up to $20,000 will not be federally taxed, thanks to the 2021 American Rescue Plan. Previously, debt cancellation was considered taxable income, with some exceptions.

Whether or not it will be taxed on a state level, on the other hand, depends on where you live.

An estimated 4 million Californians have some form of student debt.

Will I have to pay taxes on my debt relief in California?

Maybe.

Here’s what the California Franchise Tax Board says:

“Forgiveness of student loan debt is generally taxable unless it meets one of the exclusions in California Revenue and Taxation Code sections, which includes an exclusion for income-based repayments and loan cancellation under Section 1098e of the federal Education Code.”

That means if the federal government administers the relief under Section 1098e, you won’t pay taxes on it.

The U.S. Department of Education has not disclosed how it will dole out the student debt forgiveness. If it moves forward on an income-driven repayment plan, California borrowers will not have to pay state taxes.

It’s likely, though, it will be taxable in California based on the tax board’s legal review of a department of education memo. The tax board, in an email to The Bee, stated:

“In the case of the federal student loan debt forgiveness announced recently, it does not appear that the student loan forgiveness is occurring under Section 1098e; therefore, the student loan debt forgiveness would be taxable in California.”

It’s a fuzzy maybe, then, as we wait for clarification from the federal government on how this will be done.

There also may be legislative options. Assembly Speaker Anthony Rendon, D-Lakewood, and Senate President Pro Tem Toni Atkins, D-San Diego, released a joint statement in September saying “one way or another, California will not tax the federal student debt relief.”

When will I find out?

It’s uncertain.

A preview of the relief application was released online Tuesday. However, there is still no set date on when the application will be out, or how funds will be administered.

What we do know is once your application is processed, the department will review your eligibility and work with your loan servicer.

Which states will tax student loan forgiveness?

Below is a list from the Tax Policy Center stating which states are taxing student loan forgiveness, reviewing it, or not taxing it.

Taxable states:

This story was originally published October 13, 2022 at 5:30 AM with the headline "Are you getting student loan forgiveness? You might be on the hook for California taxes."