Student loan forgiveness will count as taxable income in North Carolina, the state's Department of Revenue confirmed on Thursday.
The state joins Mississippi as the second state to decide that debt forgiveness is taxable.
Under Biden's plan, up to $10,000 of student loan debt will be wiped out for federal student loan borrowers who earn less than $125,000 per year ($250,000 for married couples), while Pell Grant recipients will have up to $20,000 of debt wiped out.
But the tax consequences, especially at the state level, could diminish the forgiveness with possible tax bills, according to analysis from the Tax Foundation, which found that as many as 13 states can legally tax the forgiveness.
“As it stands, it appears that most borrowers will be exempt from federal tax on this round of debt forgiveness. However, the discharged debt is likely subject to state income tax in a number of states,” Garrett Watson, a senior policy analyst at the nonprofit think tank, said.
From a tax preparedness perspective, it’s important to note that student “debt cancellation is included in income in the year in which it is taxed,” Watson added.
As a general rule, the discharge of debt counts as income and is taxable. But the American Rescue Plan Act (ARPA), which became law in March, 2021, modified Internal Revenue code (IRC) to provide that forgiveness of student loan debt between 2021 and 2025 does not count toward federal taxable income.
“States which follow the federal treatment will exclude debt forgiveness from their own state income tax bases. But, for a variety of reasons, not every state does that,” Watson said.
North Carolina’s Department of Revenue confirmed that in a press release: "The North Carolina General Assembly did not adopt [the IRC forgiveness] for purposes of the state income tax. Therefore, student loan forgiveness excluded [for federal tax purposes] is currently considered taxable income in North Carolina."
North Carolina trailed Mississippi's Department of Revenue decision by just one day, confirming to Bloomberg that it is planning to tax residents' forgiven student loan debt under state income tax.