North Carolina says it will tax Biden's student-loan forgiveness, and 3 more states are likely to follow suit

In this May 17, 2018, file photo, new graduates line up before the start of the Bergen Community College commencement at MetLife Stadium in East Rutherford, N.J. There’s no single policy or action that will alleviate America’s $1.74 trillion student loan debt crisis while simultaneously preventing students from taking on unaffordable amounts of future debt. Higher education financing experts are divided on the exact combination of solutions, but all agree it will require a multipronged approach.
The Biden administration's student-loan-forgiveness plan is exempt from federal taxes.AP Photo/Seth Wenig
  • Student-loan forgiveness is taxable income in North Carolina, the state's Department of Revenue said.

  • The Biden administration's student-loan-forgiveness plan is exempt from federal taxes.

  • The debt relief is triggering individual state taxes in North Carolina and Mississippi.

Student-loan forgiveness will be considered taxable income in North Carolina, the state's Department of Revenue said on Wednesday.

Although the Biden administration's student-loan-forgiveness plan is exempt from federal tax, the debt relief is triggering 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 forgiven student loans from between 2015 and 2021 from federal taxes as part of the American Rescue Plan Act.

The department said in the press release: "The North Carolina General Assembly did not adopt Section 108(f)(5) of the IRC for purposes of the state income tax. Therefore, student loan forgiveness excluded pursuant to IRC 108(f)(5) is currently considered taxable income in North Carolina."

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

On Tuesday, Mississippi's Department of Revenue confirmed to Bloomberg that it's planning to tax residents' forgiven student-loan debt under state income tax.

At least 13 states are not bound to fully uphold 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 residents who qualify for the debt forgiveness aren't hit with a state tax bill.

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

A spokesperson for Wisconsin's Department of Revenue told Insider that excluding debt forgiveness from taxes required a statutory change and action on the part of the state legislature.

The spokesperson said: "At this time, this change has yet to be passed by the state legislature.

"We will certainly address this discrepancy with federal law in our upcoming biennial budget request in an effort to ensure Wisconsin taxpayers don't face penalties and increased taxes for having their loans forgiven."

A spokesperson for the Minnesota Department of Revenue told Insider that a provision to conform to the American Rescue Plan Act was not passed during the last session of the state legislature.

"If the state does not conform to this federal law, then Minnesota taxpayers who have their student debt discharged will have to add back this amount for Minnesota income tax purposes," the spokesperson said.

A spokesperson for Arkansas Gov. Asa Hutchinson said that the state's Department of Finance and Administration was currently reviewing whether debt forgiveness will be subject to state income tax.

"As a state that does not automatically adopt federal tax-policy changes to our state income tax law, we must determine whether existing state law would consider this taxable income," they said.

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

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

The department told Bloomberg it was "reviewing whether debt forgiveness in this scenario, via executive order, is subject to state income tax in Arkansas."

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