California could tax student debt relief

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California is one of seven states that has not updated its tax code to match that of the federal government.

CALIFORNIA, USA — The beta application for applying for student loan forgiveness went live over the weekend. However, unless lawmakers act quickly, this loan forgiveness will be taxed in California.

Jared Walzcak is the Vice President of State Projects at the Tax Foundation.

“We’re a nonprofit that focuses on tax policy research, and we work with legislators at the federal, state, and local levels to help them understand taxes,” Walzcak said.

He said California hadn’t updated its tax code in years.

“Last year, the federal government, under the American Rescue Plan Act, declared that any kind of student debt relief over the next several years would not be federally taxable,” Walzcak said. “States generally follow the federal government.”

California is one of seven states that will mandate student loan forgiveness.

“(California) complies with most provisions of the federal tax code, but as it existed in 2015,” he said. “They just don’t follow.”

The Student Debt Program reverses payments, but it does not pay or deposit money into a person’s account.

“Obviously, most taxpayers would gladly accept $10,000 in loan forgiveness,” Walzcak said, “But that doesn’t mean $10,000 in your bank account, does it. Now, nonetheless, you pay taxes on it as if it were.

Walzak said the average is about $500 people owe in taxes in other states, but he added that California would likely be more expensive.

Sen. Toni Atkins and President Anthony Rendon both pledged to change the law’s tax code when they return to Sacramento for the next session.

“One way or another, California will not tax federal student debt relief,” they said in a joint statement.

Walzcak said they will work within a narrow window.

“They’ll be working on a tight deadline if you want to fix this issue in California in time for people to file their taxes,” he said. “People are going to start filing their returns in January even if they aren’t due until April.”

People can start filing their taxes in January and the legislative session resumes in January.

“There is a limited window in which you can enter this before people start filing based on bad information,” he said.

The Urban Institute’s Nikhita Airi said there was an exception in California’s code that would exempt Californians from paying taxes, but the way the Biden administration’s app is set up now, she said it did not look like the case.

“Since this is a broad loan forgiveness effort that’s done outside of income-based repayment, that’s why it looks like California would be taxing,” Airi said.

Beta application for student loan relief ends

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