U.S. NEWS 09-14-2022

President Biden’s student loan relief could be taxed in certain states

The recently-announced plan allows most borrowers with a federal student loan to receive up to $10,000 in loan forgiveness. Borrowers who received a Pell Grant—available specifically to low-income undergraduate students—can receive up to $20,000 in loan relief. More than 40 million Americans are expected to see their student debt reduced or eliminated completely.

However, in some states, forgiven debt is taxed as income, which means residents may owe taxes on the amount taken off their student loans. Depending on the state’s tax rates and each taxpayer’s income, deductions, and exemptions, this tax bill could amount to several hundred dollars. Fortunately, the American Rescue Plan of 2021 made student loan forgiveness federally tax-free through 2025, so debt relief will not trigger a federal tax bill.

The Tax Foundation estimates that five states may tax student loan forgiveness: Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin. Each of these states would have to amend their current laws to conform with the federal tax exemption. Several other states were originally on this list—including Idaho, Kentucky, New York, Pennsylvania, Virginia, and West Virginia—but have since made statements that they will not tax debt relief from Biden’s program.

Arkansas does not conform to the federal tax code, and since a formal decision has not been announced, student debt will likely be taxable without legislative action. Minnesota also did not opt to follow the American Rescue Plan’s tax exemption policy, but state leaders have recently indicated that a fix for loan forgiveness could be approved during the 2023 session or even a special session. Wisconsin’s administration similarly stated that a proposal to adjust the tax law would be introduced in the state budget next year.

In Mississippi, officials said they would need to do additional research and look more closely at state laws before deciding on next steps. Loan forgiveness is also currently considered taxable income in North Carolina, but the state’s Department of Revenue is awaiting the final word from the General Assembly.

 

OTHER STATE NEWS: 

Idaho approves one-time tax rebates and introduces a new flat tax rate… for both individuals and corporations. The state is leveraging a $2 billion budget surplus to make major changes in taxation and education spending. One of the biggest changes is an ongoing $150 million tax cut through the creation of a 5.8% flat tax. This flat rate will replace the state’s four income tax brackets starting in 2023. Additionally, the first $2,500 in income will be tax-exempt for individual filers (or the first $5,000 for married couples filing jointly). The same flat rate will be applied for corporations, dropping down from the current rate of 6%.

The state legislature also approved $500 million in rebates for residents who filed 2020 and 2021 income tax returns. The minimum rebate is $300 for individuals and $600 for taxpayers filing jointly. Taxpayers will either receive that base amount or 10% of their income tax paid for 2020—whichever is greater.

Also included in the new legislation is the allocation of $410 million in annual sales tax revenue to K-12 public schools and post-secondary education. The current proposal puts $330 million toward K-12 and $80 million toward “in-demand occupations.”

West Virginia’s debates over tax reform heat up… as the governor and Senate president present opposing plans. According to the state’s Department of Revenue, tax money collected for August exceeded that month’s estimates by 32%, resulting in a $141.8 million surplus. Combined with a $92.4 million surplus in July, West Virginia’s legislators have unexpectedly large funds on their hands and are now looking to give tax relief back to residents.

However, political leaders are struggling to come to an agreement on the best approach. Governor Jim Justice put forth a proposal to use the state’s surplus tax revenue toward a 10% personal income tax cut across all six tax brackets. An alternative proposal by Senate Republicans would instead reduce personal income taxes only if consumer sales and use tax revenue increases by at least 5%.

Additionally, an amendment that could appear on the November ballot would give lawmakers the ability to reduce or eliminate certain categories of personal property taxes, including taxes on machinery and equipment, business inventory, and motor vehicles. Governor Justice has previously stated that he opposes the elimination of tangible personal property taxes, believing that only large or out-of-state businesses would benefit.

Loan forgiveness is also currently considered taxable income in North Carolina, but the state’s Department of Revenue is awaiting the final word from the General Assembly.

 

TAX PLANNING

Eco-conscious consumers could qualify for over $10,000 in tax credits and rebates under the Inflation Reduction Act. Taxpayers who purchase electric cars, high-efficiency appliances, or rooftop solar panels could receive thousands of dollars in tax benefits, though some of these may not be available until 2023 or 2024.

New electric vehicles can come with a tax credit of up to $7,500, while used vehicles can earn taxpayers up to $4,000. Both credits depend on the vehicle itself and the taxpayer’s household income. State and local governments may also provide their own incentives for purchasing electric vehicles. For new vehicles, the Inflation Reduction Act has several stipulations—for instance, the sourcing for the car battery’s minerals, the manufacturing and assembly of the battery components, and the final assembly of the car must all happen in North America.

Homeowners may qualify for the “nonbusiness energy property credit.” This 30% tax credit offers up to $1,200 per year to offset the costs of energy-efficient skylights, insulation, and exterior doors and windows. The cap rises to $2,000 for heat pumps, heat pump water heaters, and biomass stoves and boilers. The “residential clean energy credit” also offers a 30% tax credit for the installation of solar panels or other equipment that harnesses renewable energy.

With inflation on the rise, investors are looking to some lesser-known, tax-advantaged investment opportunities. Many investors are aware of the benefits of retirement funds like Roth IRAs or special savings accounts like HSAs and 529 education savings plans. Investors can also gain tax benefits through charitable donations and investments in economically distressed regions.

When the standard deduction was raised by the Tax Cuts and Jobs Act of 2017, many taxpayers no longer received tax benefits from their charitable contributions. One way to recover those benefits is through a donor-advised fund—a tax-advantaged account specifically used to make charitable donations. Investors can qualify for a tax deduction for contributions of cash, securities, and other assets to a donor-advised fund. Those assets can then be invested and grow tax-free until you are ready to disburse the funds to a qualifying charity.

Investors might also consider a qualified opportunity fund, which allows you to invest in businesses or real estate located in communities that have been deemed economically distressed by their state and the U.S. Treasury. One approach is to reinvest any capital gains into a qualified opportunity fund. This allows you to both defer your capital gains taxes and reduce your tax bill in the long run. Typically, the longer you hold onto the investment, the greater the tax benefits you will receive.

Lastly, the New Markets Tax Credit Program allows individuals and corporations to make equity investments in community development financial institutions and receive a federal tax credit. These institutions offer loans, investments, or financial counseling in specific low-income communities. The tax credit amounts to 39% of your original investment and is applied over the course of seven years.