Unless the legislature acts, California law could mean taxes on canceled student loans
As many as 1.3 million California residents now face the possibility of state law requiring them to pay state income tax on federal debt relief.
President Joe Biden announced Aug. 24 that his administration would forgive up to $20,000 per person in student debt, but it’s unclear whether current state law requires Californians to receive $10,000 or $20. $000 in debt forgiveness to pay income tax on this offset debt. Whatever the answer, California lawmakers who swear no one will pay a penny come tax time next spring.
That’s according to Senate Speaker Pro Tem Toni Atkins of San Diego and Assembly Speaker Anthony Rendon of Lakewood — the Democratic leaders of the Legislative Assembly — in a joint public tweet Friday in response to a Los Angeles article. Times.
“Rest assured, one way or another, California will not tax federal student debt relief.”
This reflects a wish from the White House, which said in a fact sheet that borrowers will not pay federal taxes on loans they no longer owe.
But some states’ tax codes, which treat debt relief as giving away a lot of money, are not the same. In California, only the elimination of certain types of federal debt can be exempt from tax, according to title 20, section 1098e of the United States code.
The US Department of Education will not say whether the debt cancellation plan will be executed through Section 1098e. Instead, a department spokesperson said he read the Biden administration’s legal memo defending the debt cancellation plan.
CalMatters asked attorneys for the California Franchise Tax Board to review that federal memo on Thursday, but the board has yet to respond.
For a single filer with no children earning $50,000, taxing $10,000 of forgiven debt would increase that person’s income tax bill by about $800, according to the tax board’s calculator.
Whatever action Atkins and Rendon take, they will need Gov. Gavin Newsom’s signature, Rendon’s spokeswoman Katie Talbot wrote in an email late Friday. And state lawmakers must act quickly. If debt forgiveness is taxable now, a change in the law will need to be in place before Californians begin filing their 2022 tax returns.