Indiana to Tax Forgiven Student Loans, Breaking From Most States

Indiana will tax student loan forgiveness after the state legislature decoupled from a federal provision exempting such debt discharge from income tax.

Residents eligible for federal student loan forgiveness under President Joe Biden’s relief plan will pay up to $323 in state income tax for $10,000 in debt cancellation, the state’s Department of Revenue said Tuesday. Pell Grant recipients, who are eligible for up to $20,000 in forgiveness, will pay up to $646 in taxes.

Forgiven student loan debt won’t be considered federal taxable income, but states such as Indiana and Mississippi will apply their state income tax. Indiana is a static conformity state, meaning its tax code is linked to the Internal Revenue Code as of a specific date. However, when the American Rescue Plan Act exempted student loan discharge from federal taxes, the Indiana General Assembly passed a law decoupling from that provision.

“As this law is clearly defined, there is no need for additional administrative rules. Any legislative change must come from the General Assembly,” said Natalie Rodriguez, communications manager for the Department of Revenue.

Hoosiers will pay additional county tax, which varies by county, the department said.