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Indiana will impose student loan forgiveness. What does this mean for Bloomington residents?

By on September 11, 2022 0

President Joe Biden announced in August 2022 that the US government would cancel federal debt up to $10,000 for people earning less than $125,000 a year.

However, the Indiana Department of Revenue has confirmed that it will tax student loan debt into a taxpayer’s income to pay state and local income taxes.

Indiana is one of seven states that is on track to tax debt discharged under Biden’s student loan forgiveness plan at the state and local level. If the rebate plan goes according to Biden’s plan, Indiana residents will see that additional tax in next year’s tax bill.

There are specific exceptions for certain types of student loan debt forgiveness, including any loan forgiveness resulting from death or total and permanent disability. These exceptions are not taxable.

Related: [‘A lot more hope’: Experts say Biden’s debt cancellation plan provides relief, security despite criticism]

Indiana’s tax rate is 3.23%, which means Indiana residents will pay $323 in income tax for every $10,000 of student loan forgiveness. This does not include county level taxes which will be added on top of this.

The Monroe County tax rate is 1.35%, which adds $135 for every $10,000 of student loan forgiveness.

Last year, Congress passed the American Rescue Plan Act which included a provision that would exempt student loan debt withdrawn from 2021 through 2025 from tax. This helped set up the framework for Biden authorizing the student loan tax exemption.

Regardless of the law, states may incorporate portions of the federal tax code into their own tax system to some extent. This means that they can automatically adopt changes as they are made at the federal level.

Related: [Biden announces up to $20K in federal student loan debt will be forgiven]

States like Indiana follow a static basis, meaning they mostly follow the Internal Revenue Code, but only as it reads on a fixed date, with the date being updated regularly.

Some states also follow a pre-American Rescue Plan Act version of the code, which allows student loan forgiveness to be enforced. These states have the option to edit and add the exclusions separately or decide to follow the updated version to make loan forgiveness tax-free. Even though Indiana followed a post-American Rescue Plan Act version of the code, they chose to break the law on this issue.

The current state budget, which passed last year, broke with the federal definition of adjusted gross income on several issues for tax purposes. This paved the way for the exemption of the American Rescue Plan Act’s student loan exemption provision from the state code.