Wisconsin Borrowers Must Pay Taxes on Forgiven Loans

According to the policy released last week by the Biden administration, Wisconsin borrowers will be responsible for paying state taxes on any federal student debt forgiveness.

Wisconsin residents with $10,000 in debt might anticipate a tax liability of about $530. In spite of the large cost, according to Jared Walczak of the nonprofit Tax Foundation, the investment is worthwhile.

“Overall, this is a wonderful deal for someone who has debt relief,” he stated. It’s still a fantastic deal if you get $10,000 in debt relief but have to pay $530 in state taxes, but you should be prepared for that.


Wisconsin Borrowers Must Pay Taxes on Forgiven Loans
Wisconsin Borrowers Must Pay Taxes on Forgiven Loans

According to Walczak, however, the borrower would have to pay the tax obligation out of their own pocket because the $10,000 in forgiven debt does not appear in their account.

Debt cancellation, like investment gains, is considered income by the government whether or not it is deposited in a bank account. Wisconsin’s tax law has not been amended to reflect the federal government’s stance that student loan debt relief is not taxable.

Changing this in time for Wisconsin residents’ 2019 tax returns would need action from the state’s legislature, which is not expected to convene until the new year.

Through a spokeswoman, the state Department of Revenue stated that it will lobby state lawmakers to not tax the discharge of student loan debt. It will do so in the department’s next budget proposal, which will be sent to lawmakers in the spring of 2019.

According to Walczak, the forgiven debt will most likely be taxed at the individual borrower’s current tax bracket.

“Someone could have been in graduate school or law school in 2020 and now have a great practice — they could be in that higher bracket, but it’s not going to be the average beneficiary,” he added.

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