Arkansas students who cancel their school debt could be taxed

Millions of Americans could receive up to $10,000 in federal student loan debt forgiveness. How does this apply to the Arkansans?

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 thanks to a plan announced by President Biden.

But what does this mean for the Arkansans?

This could mean that any money received to cancel student debt could 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 receive loan forgiveness. So why is Arkansas one of those states?

Scott Hardin, spokesman for the Arkansas Department of Finance and Administration (DFA), said, “You have states that are not compliant, so when the federal government changes the tax code at the federal level , the majority of states automatically adopt it.”

Hardin says Arkansas is not one of those states.

Currently, the DFA is reviewing Arkansas law regarding the situation.

Hardin wants the Arkansans to know that the answer comes down to current law.

“We want to be clear, it’s not the state deciding today that ‘well, we think the Arkansans should pay taxes on this.’ We’re definitely not doing that,” Hardin said. .

“We’re just looking at the existing laws and deciding the legality of that, is that taxable income? And that’s what we’re going to be looking at closely.”

If Arkansas law states that these funds are considered additional income, anyone who receives the debt forgiveness could see up to $550 in additional taxes when filing their 2022 taxes. More would be taxed if you are a Pell Grant recipient.

However, the number could fluctuate. If you currently owe less than the allowable remittance amount, income tax would be on whatever was received.

RELATED: Sen. Tom Cotton Calls Student Loan Cancellation Plan a ‘Bailout’

There is also an income test to determine who is eligible for student loan debt forgiveness. If you are a person earning $125,000 or less, or if you are married and have a combined income of $250,000 or less, you qualify.

Hardin expects an answer to come in the coming week for the Arkansans on whether or not the debt forgiveness will be taxable. Hardin said there’s a chance that even though it’s taxable, state lawmakers could change the law early next year.

Jared Walczak, the vice president of state projects for the Tax Foundation agrees with Hardin, but reiterated that there is a narrow window for lawmakers to make changes before the Arkansans file their taxes. .

“People would have to file amended returns, make changes if they did, and then the law would change,” Walczak said. “It would also have to be emergency legislation, meaning it should come into force as soon as it is passed. Most laws come into force on July 1, which is too late. But there are ways lawmakers, if they were so inclined, could address this issue early in the next session.”

Anyone with a federal student loan or a Pell Grant recipient who receives debt forgiveness should consult a tax professional at tax time to be aware of any potential income tax they may have to pay.

RELATED: Expert Says 13% of Arkansas Population Will Benefit from Student Loan Relief Plan

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