Some Hoosiers could see more than $1,000 added to their tax bills next year due to a provision in state law that would address student loan debt, forgiven under an announced plan. recently by President Joe Biden to fulfill a campaign promise and relieve millions of borrowers. , as taxable income.
Biden’s plan will forgive up to $20,000 in federal student loan debt for people earning less than $125,000 who qualified for a Pell grant to help pay for their college education, which usually means they came of a low-income household. Other borrowers will receive a rebate of up to $10,000, provided their annual income is also below the $125,000 threshold.
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More than 900,000 Hoosiers have federal student loan debt. Nearly a third of them would see all of their federal debt wiped out under Biden’s forgiveness plan.
For federal purposes, the discharged debt will not count as the taxpayer’s income, and many other states have said they will follow this example for state and local tax purposes.
This is not the case in Indiana, however. The Indiana Department of Revenue has confirmed that the state will add the debt to the taxpayer’s income for purposes of paying state and local income taxes. If the pardon was completed this year, as is Biden’s plan, Hoosiers would see it appear in next year’s tax bill.
A spokesperson for the Indiana Department of Revenue said any changes would have to be legislative. At least one lawmaker has said they will introduce legislation to retroactively eliminate and reverse any personal income taxes imposed on Hoosiers who receive federal student debt relief.
Language in a 2021 law, however, is why Hoosiers will be taxed in the first place. Last year’s budget bill included language to remove the federal exemption on the taxation of canceled student loan debt.
House Speaker Todd Huston, R-Fishers, told IndyStar in an email that lawmakers made the change before they knew what the federal student loan cancellation looked like because they wanted to understand the impact. it would have before deciding to follow the example of the federal government. it is duty free.
“Moving forward, I expect conversations to continue on this topic as we head into the next legislative session,” Huston said.
Here’s what you need to know about how and why Indiana will impose federal student loan forgiveness:
How much will loan forgiveness add to my state and local tax bill?
Since Indiana’s tax rate is 3.23%, that means Hoosiers will pay $323 in income tax for every $10,000 of student loan forgiveness. There are also county-level taxes, which vary by county. For example, Marion County’s 2.2% rate would equal an additional $202 in taxes for every $10,000 remitted.
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A Pell Grant recipient who lives in Indianapolis and received the full $20,000 rebate would be liable for an additional $1,050 in income tax.
Why is Federal Student Loan Forgiveness Imposed in Indiana?
Generally, a debt that is paid for less than you owe is treated as taxable income. There are exceptions, such as debts discharged through bankruptcy.
When Congress passed the American Rescue Plan Act last year, it included a provision that would exempt student loan debt discharged from 2021 through 2025 from an individual’s taxable income. This essentially set up the framework for Biden to allow widespread student loan forgiveness and make him tax-exempt.
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Most states follow the federal government and do not count debt canceled under the plan as taxable income. It is common for states to incorporate portions of the federal tax code into their own tax system to some extent. However, how they do this may vary, which is why some states handle loan forgiveness differently.
Some states comply with the Internal Revenue Code on an ongoing basis, which means they automatically adopt changes as they are made at the federal level. Some are selective, incorporating only a few elements or definitions, but otherwise omitting large parts in favor of their own policies.
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Indiana complies on a static basis, which means it largely complies with the IRC, but only as it reads on a fixed date. This date is regularly updated.
Some states follow a pre-ARPA version of the code, so the provision to exclude student loan debt discharged between 2021 and 2025 from income tax calculations would not be included and that state would be likely set up to tax canceled loans under the Biden plan as income. They could choose to update their compliance date or add the exclusion separately, if they wanted to follow suit with the federal government and make the rebate tax-exempt.
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Indiana complied with a post-ARPA version of the code but chose to depart from it on this issue.
The current state budget, passed last year, broke with the federal definition of adjusted gross income for tax purposes on several counts — providing exemptions in some places and adding federal exemptions in others. He removed the ARPA student loan forgiveness exemption from the state code, forcing Indiana to pay the tax debt discharged under Biden’s plan.
This does not apply to exceptions for certain types of pre-ARPA student loan debt forgiveness, such as the civil service loan forgiveness program, insolvency or bankruptcy, according to the Department of Education. Income from Indiana. The ministry has also confirmed that a pardon resulting from death or total and permanent disability is not taxable.
“In 2021, the federal government made changes to federal tax law to exclude student loan forgiveness as income,” Huston said. “At the same time, it left states in the dark about the potential impact of this change or how it might possibly relate to a future program. Typically, a policy rollout would precede a code change. federal taxes.
“Virtually every Republican and Democratic lawmaker in Indiana decided not to blindly align the Indiana code with the federal code because we wanted to understand the impact on Hoosier ratepayers and make an informed decision.”
The final version of House Bill 1001, the state budget, passed with nearly unanimous support last year after a last-minute windfall of state tax dollars led lawmakers to make historic investments in the state’s public education system and giving teachers long-sought raises.
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However, other types of debt cancellation might be subject to state taxes, such as debt cancellation after a successful defense claim by the borrower. The Biden administration has canceled billions of dollars in federal student loans taken out by students who attended schools they believe defrauded them. This includes high-profile examples such as Corinthian Colleges and Carmel-based ITT Tech. Earlier this year, the federal government forgave all student loan debt for students attending either of the now defunct for-profit institutions.
How many states are taxing canceled debt under Biden’s student loan forgiveness plan?
According to the Tax Foundation, Indiana is one of seven states that is on track to tax debt discharged under Biden’s student loan forgiveness plan at the state and local levels.
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Will I definitely have to pay taxes on my federal student loan debt that is forgiven?
Current law would tax Hoosiers who receive federal student loan debt forgiveness. Legislation would be needed to change that.
Rep. Greg Porter, D-Indianapolis, said he would introduce legislation to do just that in the next legislative session. Porter said he will draft legislation to “eliminate and retroactively cancel any state personal income tax” imposed on Hoosiers who receive student loan forgiveness.
“Many student borrowers have repaid their original loan amount, then some, but interest rates have prevented them from paying off their debt and using that money to buy a home, save for retirement or starting a family,” Porter said in a statement. “The federal government and the vast majority of other states have correctly chosen not to mandate student debt cancellation. I can’t say I’m surprised that Indiana has chosen to take a punitive stance on a policy designed to relieve the American working class, but there is still time to change that.”
Porter said it was unfair to impose student debt relief when the state has a $6.1 billion surplus.
The legislative session begins in January. Porter would need Republican support to pass the measure because the GOP has a supermajority in both chambers of the Indiana Statehouse. Huston said he expects “conversations to continue on this topic.”
Call IndyStar education reporter Arika Herron at 317-201-5620 or email her at [email protected] Follow her on Twitter: @ArikaHerron.