As many as 1.3 million California residents are now facing the possibility that state law will require them to pay state income tax on the federal debt relief.
President Joe Biden announced Aug. 24 that his administration will forgive as much as $20,000 per person in student debt, but it’s unclear whether current state law requires Californians receiving $10,000 or $20,000 in debt forgiveness to pay income tax on that cleared debt. Whatever the answer, California’s lawmakers that vow no one will pay a dime by tax time next spring.
That’s according to Senate President Pro Tem Toni Atkins of San Diego and Assembly Speaker Anthony Rendon of Lakewood — the Democratic leaders in the Legislature — in a joint public tweet Friday responding to an article in the Los Angeles Times.
“Rest assured, one way or another, California will not tax the federal student debt relief.”
That mirrors a vow from the White House, which said in a fact sheet that borrowers won’t pay federal taxes on the loans they no longer owe.
But the tax codes in some states, which treat debt relief like the gifting of much cash, beg to differ. In California, only the elimination of certain types of federal debt can be exempt from taxation, according to Title 20 section 1098e of the U.S. Code.
The U.S. Department of Education won’t say whether the debt forgiveness plan will be executed through section 1098e. Instead, a department spokesperson said to read the Biden administration’s legal memo defending the debt forgiveness plan.
CalMatters asked the California Franchise Tax Board lawyers to review that federal memo Thursday but the board has not yet responded.
For a childless single filer earning $50,000, taxing $10,000 in forgiven debt would raise that person’s state income tax bill by about $800, according to the tax board’s calculator.
Whatever action Atkins and Rendon push through, they’ll need Gov. Gavin Newsom’s signature, wrote Katie Talbot, a spokesperson for Rendon, in an email Friday evening. And state lawmakers need to act fast. If the debt forgiveness is taxable now, a law changing that will need to be in place before Californians start filing their 2022 tax returns.