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Unless California lawmakers take action, student debt relief will be taxed

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

CALIFORNIA, USA — The beta application to apply for student loan forgiveness went live over the weekend. However unless lawmakers act soon, that loan forgiveness will be taxed in California.

Jared Walzcak is the vice president of state projects at the Tax Foundation.

"We're a nonprofit organization that focuses on tax policy research, and we work with lawmakers at the federal and state and local level to help them understand taxes," Walzcak said.  

He said California has not updated it's tax code in years. 

“The federal government last year under the American Rescue Plan Act said that any sort of student debt relief in the next few years would not be taxable to federal level." Walzcak said. "States usually follow the federal government.”

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

“(California) conforms to most of the provisions of the federal internal revenue code, but as it existed in the year 2015," he said. "They're just not keeping up.”

The student debt program forgives payments, but it doesn't pay or deposit money into a person's account. 

“Obviously, most taxpayers would gladly take $10,000 in loan forgiveness," Walzcak said, "But that doesn't mean $10,000 in your bank account, right. Now, nonetheless, you pay on it in taxes just as if it was.”

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

Senator Toni Atkins and Speaker 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 the federal student debt relief” they said in a joint statement. 

Walzcak said they will be working in a tight window. 

“They'll be working in a tight window if you want to address this in California in time for people to file their taxes," he said. "People are going to start filing in January even though they're not due until April."

People can start filing their taxes in January, and the legislative session starts up again in January. 

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

Nikhita Airi with the Urban Institute said there’s one exception in the California code that would make Californians exempt from paying taxes, but the way the Biden administration’s application is set up now, she said that does not look like the case.

“Since this is a broad based loan forgiveness effort that's being done outside of income-based repayment, that's why it would appear that California would tax,” Airi said. 


Beta application for Student Loan Relief closes

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