Gov. Gavin Newsom on Saturday urged the California Legislature to act quickly to prevent student loan borrowers from having to pay state income taxes on up to $20,000 in federal debt forgiveness.
The Biden administration announced in August a sweeping, one-off loan forgiveness program that would wipe out thousands of dollars in direct federal loan debt. Borrowers who meet the program’s income limits — less than $125,000 for a single person or $250,000 for a couple — will be forgiven up to $10,000 in debt, or up to $20,000 if they are a state Pell -receive grant.
Tax authorities treat canceled debt as income in many cases. Under federal law, the amounts waived by the Biden Initiative are ignored by the Internal Revenue Service. However, analysts say they are treated as taxable income under current state law in California.
Newsom said the interim budget he will present in January will include a proposal to exempt the canceled debt from state taxes. The change would save more than 3.5 million borrowers in the state — including more than 2.3 million Pell Grant recipients — up to $1.3 billion, he said.
“Californians who receive student debt relief should not be taxed for it,” Newsom said in a statement. “I look forward to working closely with the Legislature to achieve this through early action.”
Newsom’s position puts him in line with leading Legislative Democrats. The leaders of the State Assembly and Senate tweeted in September that they would ensure that the amounts forgiven are not taxable.
The US Department of Education began accepting applications for loan forgiveness last month and is expected to begin debt relief by the end of the year. But legal battles have clouded his future.
The program is being challenged in multiple courts across the country by Republican officials and conservative groups. Though judges have blocked at least two of the cases over plaintiffs’ lack of standing to sue, a federal appeals court has temporarily barred the Department of Education from forgiving loans while it reviews six GOP-led states’ request for a debt relief injunction.
The department said it will continue to process applications and identify borrowers who are automatically eligible for the debt relief program while the litigation continues.
https://www.latimes.com/california/story/2022-11-05/newsom-california-student-loan-forgiveness-tax-exemption-proposal Newsom calls on California not to tax forgiven student loans