Back in 2018, I was unemployed for eight months. Come April of 2019, I learned that while California doesn’t tax unemployment checks, the federal government does.
That meant that after a year on the edge of poverty, I suddenly had a $1,400 federal tax bill to pay. This was money that was supposed to help me. Instead, it became a burden.
If student loan forgiveness is taxed, that will be a similar hardship for millions of Americans, except with the federal and state roles switched: California could become one of the states that will tax the federal government’s student loan debt relief program of up to $20,000 per individual. That would cost those debt relief recipients hundreds of dollars in taxes next year.
That doesn’t have to happen: Federal and state governments are able to add exceptions to the tax law, as they did with the 2021 American Rescue Plan Act for student and parent borrowers. It’s exactly this kind of carve-out that relief recipients need.
It all comes down to some wonky tax laws.
If a state uses the current definition of federal adjusted gross income, then forgiven student loans are not taxable under states’ income taxes; but if a state conforms with the federal definition of AGI as defined before March 2021 — known as “static conformity” — forgiven student loan debt will be treated as taxable income, according to research done at the Brookings Institution’s Tax Policy Center.
States in the latter category include Minnesota, Wisconsin, California, Massachusetts, Michigan and Wyoming.
In some but not all cases, which party is in power plays a role in this divide: In Pennsylvania, Democratic Governor Tom Wolf said the exclusion will apply to federally-forgiven student loans, while Mississippi’s Republican governor, Tate Reeves, confirmed that forgiven student loans will be considered taxable income.
California’s Democratic legislative leaders, Senate President Pro Tem Toni Atkins (D-San Diego) and Assembly Speaker Anthony Rendon (D-Lakewood), promised in a joint tweet that relief recipients would not be taxed, though federal and state tax laws usually classify any forgiven debts as taxable income unless the recipient has declared bankruptcy.
In their statement, Rendon and Atkins promised that they will work to make student debt relief exempt through legislation in early 2023.
“Once the federal government finalizes details of the student debt relief program, we will know whether the relief is tax exempt under current California law,’ their statement read. “If not, we will make the relief tax exempt through immediate action in early 2023. Rest assured, one way or another, California will not tax the federal student debt relief.”
The fact that this is a question at all is a potential worry for Californians counting on the relief program to help ease the financial pain of predatory loans.
It took me more than a year to dig myself out of my tax bill hole, giving up a precious $100 each month for over a year to pay back money that was treated by one government entity as a gift and the other as a loan.
Our state should not tax this relief, and until the situation becomes clear, Californians the federal government is trying to help will continue to worry about it.
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ABOUT THE WRITER
Robin Epley is an opinion writer for The Sacramento Bee.
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