FORT SMITH, Ark. — Millions of Americans with federal student loans could soon see up to $10,000—or $20,000 for Pell Grant recipients— forgiven due to a plan announced by President Biden.
But what does that mean for Arkansans?
It could mean that any money received to cancel student debt may be considered additional income and taxed in 2023.
According to The Tax Foundation Arkansas is one of 13 states that could potentially charge income tax to those who benefit from loan forgiveness. So why is Arkansas one of these states?
Scott Hardin, spokesperson for the Arkansas Department of Finance and Administration (DFA) says, "you have states that are non-conformity states, so when the federal government makes a change on the federal level to the tax code, the majority of states just adopt it automatically."
Hardin says Arkansas is not one of those states.
Currently, the DFA is reviewing Arkansas law as it relates to the situation.
Hardin wants Arkansans to know the answer boils down to the current law.
"We want to be clear, this isn't the state deciding today that 'well, we think Arkansans should pay taxes on that.' We certainly don't do that," said Hardin.
"We're just looking at the existing laws and deciding the legality of that, is it taxable income? And that's what we're going to take a hard look at."
If Arkansas law says these funds are considered additional income, anyone who receives the debt forgiveness could see upwards of $550 in additional income taxes when filing their 2022 taxes. More would be taxed if you are a Pell Grant recipient.
The number could fluctuate, however. If you currently owe less than the eligible forgiveness amount, the income tax would be for whatever was received.
There is also an income criterion for who is eligible to have student loan debt forgiven. If you are an individual earning $125,000 or less, or married filing jointly with a combined income of $250,000 or less, you are eligible.
Hardin expects an answer to come in the coming week for Arkansans on whether or not the debt cancellation will be taxable. Hardin did say there is a chance even if it is taxable, state legislators could amend the law early next year.
Jared Walczak, the vice president of state projects for The Tax Foundation agrees with Hardin, but reiterated there is a narrow window for legislators to make changes before Arkansans file taxes.
"People would have to file amended returns, make changes if they filed and then the law changed," said Walczak. "It would also have to be emergency legislation, by which I mean, that it would have to go into effect on passage. Most laws go into effect July 1, which is too late. But there are ways that lawmakers if they were so inclined, could address this early in the next session."
Anyone with a federal student loan, or Pell Grant recipient, that benefits from debt forgiveness should consult a tax professional come tax time to be aware of any possible income tax they may need to pay.
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