Biden’s loan forgiveness is currently taxable income in North Carolina

0

title=

North Carolina borrowers who get their loan forgiven will be taxed on that income, the North Carolina Department of Revenue said.

Raleigh

More than a million borrowers in North Carolina received good news last week when President Joe Biden announced plans to forgive up to $20,000 in federal student loan balances after a two-day hiatus. years on payments.

But those borrowers may want to set aside canceled funds for when they file their taxes next year. Under North Carolina tax law, canceled loans are considered taxable income at the state level.

That’s according to a statement from the North Carolina Department of Revenue, shared Wednesday night in response to a question from The Charlotte Observer.

Although the federal government ruled the tax rebate exempt under the U.S. bailout, North Carolina tax law did not adopt this tax guideline. Canceled federal student loans are “currently considered taxable income” in the state, the agency said in its statement.

Here’s what else you need to know.

Is Biden’s federal student loan forgiveness tax-exempt?

Whether the President’s Loan Forgiveness Plan will be completely tax-free depends on where you live.

The canceled debt will be exempt from federal taxes, thanks to a provision of the U.S. bailout passed in March 2021. The law states that any student loan forgiveness occurring between 2021 and 2025 will be tax exempt.

Usually, “paid-off debt” — like a canceled loan — is considered taxable income in the United States, said Ben Martinek, founder of tax preparer and consulting firm Student Loan Tax Experts.

But the US bailout provision means student loan forgiveness is an exception to that rule — at least until 2025, he said.

Why is student loan forgiveness not exempt from NC taxes?

Whether or not canceled student loan debt is state-exempt will depend on the law you live in.

Some states automatically apply federal tax guidelines like those included in the U.S. bailout, said Frances Ellington Gutierrez, tax partner at accounting firm GHJ and adjunct assistant professor at UNC’s Kenan-Flagler Business School.

Others, like North Carolina, do not automatically update their tax laws to reflect federal changes.

And North Carolina specifically separates itself from federal tax law on the issue of student loan forgiveness, Gutierrez said, pursuant to state law.

The implications of the law are spelled out in a guide 2021 to the NC Personal Income Tax filing, distributed by the State Department of Revenue.

Changing that law would require legislative action, said Hughlene Burton, a certified public accountant and associate professor at UNC Charlotte’s Belk College of Business. Burton specializes in personal tax matters.

“Whenever there’s a major tax change, they should come up with a bill that goes through both houses (and) would essentially update the tax code,” she said.

How much tax can I expect?

The North Carolina personal income tax rate for 2022 is 4.99%.

So a borrower who got a $10,000 forgiveness under Biden’s plan could expect a tax liability of about $500 when filing their NC taxes, Burton said. A borrower who got $20,000 forgiven could expect a hit of almost $1,000 from their forgiven debt, she said.

Guttierez pointed out that it’s possible lawmakers in North Carolina or other states will change current tax laws before next year’s filing deadline to make canceled student loan debt tax-exempt at the level of State.

“We don’t know if that’s going to happen,” she said. “We can (only) assess the rules from today.”

In the meantime, Martinek suggested borrowers set aside funds now, plan for a smaller repayment and, as always, ask a tax professional if they have any questions or concerns about filing their taxes.

Charlotte Observer Related Stories

Hannah Lang covers banking, finance and economic equity for The Charlotte Observer. His work has appeared in The Wall Street Journal, Triangle Business Journal and Greensboro News & Record. She studied business journalism at the University of North Carolina at Chapel Hill and grew up in the same town as her alma mater.

Share.

Comments are closed.