North Carolina says student loan forgiveness will be taxed

  • Student loan forgiveness is taxable income in North Carolina, the state Department of Revenue confirmed.
  • The Biden administration’s student loan forgiveness plan is federally tax-free.
  • Debt relief triggers individual state taxes in North Carolina and Mississippi.

Student loan forgiveness will be considered taxable income in North Carolina, the state Department of Revenue announced Wednesday.

Although the Biden administration’s student loan forgiveness plan is federally tax-free, the debt relief still triggers some individual state taxes.

In North Carolina, student loan relief is taxable because the state has not fully adopted a specific section of the Internal Revenue Code. Congress used the provision – Section 108(f)(5) – to exempt student loan forgiven between 2015 and 2021 from tax as part of the American Rescue Plan Act.

The department said in the press release, “The North Carolina General Assembly has not enacted IRC section 108(f)(5) for state income tax purposes. Therefore, student loan forgiveness excluded under IRC 108(f)( 5) is currently considered taxable income in North Carolina.”

North Carolina’s announcement makes it the second state to confirm that student loan relief will count as taxable income.

On Tuesday, the Mississippi Department of Revenue confirmed to Bloomberg that it plans to tax resident student loan debt relief with state income tax.

At least 13 states are not required to fully maintain the federal tax exemption when it comes to state tax, according to the Tax Foundation. But some, including New York and Hawaii, have already moved to ensure that residents who qualify for debt relief are not hit with a state tax bill.

The Tax Foundation now projects three more states, Arkansas, Minnesota and Wisconsin, to tax student loan forgiveness.

A spokesperson for the Wisconsin Department of Revenue told Insider that excluding debt forgiveness from the tax would require legislative changes and action by the state legislature.

The spokesman said: “At this time this change has not yet been passed by the State Legislature.

“We will certainly address this inconsistency with federal law in our upcoming biennial budget request in an effort to ensure that Wisconsin taxpayers do not face penalties and increased taxes for their loan forgiveness.”

A spokesperson for the Minnesota Department of Revenue told Insider that a provision introduced in May to match the American Bailout Act was not passed during the last session of the state legislature.

“If the state does not comply with this federal law, then Minnesota taxpayers who have discharged student debt will have to add that amount back for Minnesota income tax purposes,” the spokesman said.

A spokesman for Arkansas Gov. Asa Hutchinson said the state Department of Finance and Administration is currently reviewing whether the debt forgiveness will be subject to state income tax.

“As a state that does not automatically adopt federal tax policy changes into our state income tax law, we must determine whether existing state law will consider this taxable income,” they said.

The spokesperson added that they expect a decision on the student loan tax in the next few days.

Representatives for the Arkansas Department of Finance and Administration did not immediately respond to Insider’s request for comment made outside normal business hours.

However, the department told Bloomberg that it is “reviewing whether debt forgiveness in this scenario, through executive order, would be subject to Arkansas state income tax.”

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