Student loan forgiveness will be considered taxable income in North Carolina, the state Department of Revenue announced Wednesday. Although the Biden administration’s student loan forgiveness plan is exempt from federal tax, the debt relief still triggers some individual state taxes. In North Carolina, student loan relief is taxable because the state has not fully adopted a certain section of the Internal Revenue Code. Congress used the provision — Section 108(f)(5) — to exempt forgiven student loans between 2015 and 2021 from taxes as part of the American Rescue Plan Act. The department said in the news release: “The North Carolina General Assembly has not adopted IRC Section 108(f)(5) for state income tax purposes. Therefore, student loan discharge is exempt under IRC 108(f) (5) is currently considered taxable income in North Carolina.” North Carolina’s announcement makes it the second state to confirm that student loan relief will count as taxable income. On Tuesday, the Mississippi Department of Revenue confirmed to Bloomberg that it plans to tax resident forgiven student loan debt under state income tax. At least 13 states are not committed to fully complying with the federal tax exemption for state tax, according to the Tax Foundation. But some, including New York and Hawaii, have already moved to ensure that residents who qualify for debt relief aren’t hit with a state tax bill. Now the Tax Foundation predicts that three more states, Arkansas, Minnesota and Wisconsin, may tax student loan forgiveness. A spokesperson for the Wisconsin Department of Revenue told Insider that excluding debt forgiveness from taxes required legislative change and action on the part of the state legislature. The spokesman said: “At this time, this change has yet to be passed by the state legislature. “We will certainly address this discrepancy with federal law in our upcoming biennial budget request in an effort to ensure that Wisconsin taxpayers do not face penalties and increased taxes for their loan forgiveness.” Representatives for both the Arkansas and Minnesota Departments of Revenue did not immediately respond to Insider’s request for comment, which was made outside regular business hours. However, the Arkansas Department of Finance and Administration told Bloomberg that it is “reviewing whether the debt cancellation in this scenario, through executive order, would be subject to Arkansas state income tax.” The department added that it will make a decision on the student loan tax in the coming days. A spokesman for the Minnesota Department of Revenue told CNBC that during the last session of the state legislature, no provision was approved to align with the tax exemption of the American Bailout Act. The spokesman added, “If the state does not comply with this federal law, then Minnesota taxpayers who have paid off their student debt will have to add that amount back in for Minnesota income tax purposes.”
