State Taxation of Forgiven Student Loans

On August 24, 2022, President Biden announced that the U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients if the borrower's individual income is less than $125,000 ($250,000 for households). Although canceled debt is usually includable in an individual's federal gross income, §9675 of the American Rescue Plan Act excludes such canceled debt income for discharges occurring after December 31, 2020, and before January 1, 2026. Whether a borrower is taxed at the state level on the discharged or partially discharged loan will largely depend on if and how the borrower's state income tax code conforms to the Internal Revenue Code (Code).

Massachusetts. Effective January 1, 2022, a deduction from Massachusetts gross income in whole or in part is allowed, for income attributable to the discharge of a postsecondary education loan, a private education loan, a loan made by any educational organization or any private education lender, or a refinance of such an education loan. Also, Massachusetts' conformity law includes the American Rescue Plan Act (ARPA), so that income from the discharge of student loans excluded by ARPA may also be excluded from Massachusetts gross income. (Massachusetts Technical Information Release No. 22-2, 01/12/2022.)

Rhode Island. The Rhode Island Division of Taxation has announced that Rhode Island is adhering to the federal tax treatment of student loan debt forgiveness and will not be including the discharge of up to $20,000, for qualifying individuals, in Rhode Island taxable income from January 1, 2021 through December 31, 2025. (R.I. Treatment of Student Loan Debt Forgiveness, R.I. Div. of Taxation, 09/09/2022.)