MILWAUKEE — If you’re about to receive federal student loan forgiveness in Wisconsin, the Department of Revenue says it’s prepared to pay state income taxes on that relief.
Wisconsin is one of a handful of states where loan forgiveness will be treated as taxable income unless the state legislature acts to change that.
There is no federal income tax for the student loan relief that borrowers receive, but there is not at the state level in Wisconsin. A Milwaukee accountant says that depending on how much you earn and how much you’ve forgiven, you could pay hundreds to over a thousand dollars in additional taxes when you file next spring.
Rachel Campbell says she had no idea she would be taxed by the state on the $20,000 debt she is writing off.
“I’m not very happy about that,” she said. “Let me start a clean slate.”
Dozens of other states have no income tax or have already complied with the provisions of the American Rescue Plan Act which removed federal income tax from this student debt relief.
Tax accountant Jaquilla Ross says Wisconsin is one of 13 states where the rebate is currently expected to come with income tax.
“If you get the $10,000 back, you can expect to pay at least $530 and that’s the minimum, but it will basically depend on your income,” she said. “If you’re forgiven for $20,000, you can basically expect a little over $1,100.”
The state tax rate is 5.3% on single incomes over $24,250 and for married taxpayers with incomes over $32,330.
The Wisconsin Department of Revenue said the state legislature should strike down the tax to bring it into line with the federal government.
The department says it is asking the Legislative Assembly to pass these changes. “It pays to be in tune with the IRS,” the department’s director of communications said in an email.
It’s something the governor of Minnesota has asked for and his legislature is already considering.
Since Republicans have majority control in the Wisconsin Legislature, TMJ4 went to state Rep. Adam Neylon to see if that could happen here.
“I’m a Republican, but this might be the first tax break I would oppose,” he said.
Rep. Neylon says he and his fellow Republicans oppose this student loan relief in the first place.
“I think in this specific case, when you’re talking about debt relief for people who voluntarily took and participated, I think it’s almost a double win in some ways,” he said.
The borrowers we spoke with pay around 5% tax on what they get forgiven, it’s still much better than paying the full amount.
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