Virginians won’t have to pay income tax on forgiven federal student debt recently announced by the White House, thanks to efforts in previous years to make sure Virginians weren’t taxed on COVID-19 relief.
“[T]he amount of student loan debt that was forgiven will be left out of federal adjusted gross income, and, by extension, Virginia taxable income, without any further action by the General Assembly,” Virginia Division of Legislative Services Stephen Kindermann said in an email Delegate Vivian Watts (D-Fairfax) shared with The Virginia Star.
Watts and Delegate Joe McNamara (R-Roanoke) said that Virginia’s tax code doesn’t automatically update to match federal tax code, and every year, the Virginia General Assembly passes emergency legislation to bring parts of the state’s tax code into conformity with federal code. Facing a similar situation with forgiven Paycheck Protection Program loans in 2021, both Watts and McNamara worked to make sure that Virginia employers were exempted from PPP-related income; the general assembly eventually allowed an income tax deduction of up to $100,000.
Last week, Bloomberg reported that residents of some states would face income tax bills on the up to $20,000 of forgiven student debt, which would normally be taxable income in federal and Virginia tax code. However, the 2021 American Rescue Plan Act (ARPA) exempted forgiven student loan debt, and the general assembly brought Virginia’s tax code into conformity with that change.
“[W]e conformed to the ARPA 9675 provision excluding student loan debt forgiveness from federal gross income and no Virginia legislative change is necessary,” Kindermann said in his email. “ARPA section 9675 created a special rule that said federal “gross income will not include” any future discharges of student loans in anticipation of the recently announced loan forgiveness program.”
Although Republicans might not have been eager to exempt the newly-forgiven debt, since the income tax exemption is already included in Virginia law, the general assembly would have to work specifically to make forgiven student debt taxable, a move McNamara said is unlikely.
In his email, Kindermann said that the general assembly has worked in the past to clarify exceptions already included in state law, including in 2020 with Senator John Bell’s (D-Loudoun) SB 745, which codified excluding income from cancelled student loans belonging to certain disabled veterans, even though Virginia already conformed to a federal tax exemption for that income.
“The bill had no revenue impact because (1) the discharge of indebtedness income exempted under the bill was already not taxable for federal income tax purposes and (2) Virginia conformed to that federal provision when it advanced its date of conformity during the 2019 Session and generally conformed to the Tax Cuts and Jobs Act,” Kindermann wrote. “So that disabled veteran forgiven student loan income, much like recent student loan forgiveness authorized by ARPA, would not be taxed in Virginia, because it is excluded from federal adjusted gross income, through operation of the respective conformity bills alone.”
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Eric Burk is a reporter at The Virginia Star and The Star News Network. Email tips to [email protected].
Photo “Two People Doing Taxes” by Mikhail Nilov.