Paoli, IN asked in Tax Law for Indiana

Q: My student loan was forgiven in 2023 under IDR adjustment. Effective date was 2017. Will IN still tax it?

F. Student Loan Debt Discharge

Under Section 9675 of the American Rescue Plan Act of 2021, student loans discharged

between Jan. 1, 2021, and Dec. 31, 2024, inclusive, are excluded from federal gross income

under IRC § 108(f)(5). Under IC 6-3-1-3.5(a)(30), student loans discharged pursuant to

this section are required to be added back into Indiana adjusted gross income.

However, the addback does not affect student loan discharges under IRC §108(f)(1)-(4).

In addition, if a student loan is discharged while the borrower is insolvent, the exclusion

under IRC § 108(a)(1)(B) is permitted and takes precedence for Indiana adjusted gross

income tax purposes.

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1 Lawyer Answer
James L. Arrasmith
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  • Tax Law Lawyer
  • Sacramento, CA

A: Regarding your student loan forgiveness in Indiana under the IDR (Income-Driven Repayment) adjustment, it's important to understand how state tax laws apply. The American Rescue Plan Act of 2021 exempts forgiven student loans from federal income tax between January 1, 2021, and December 31, 2024. However, state tax laws may differ.

In Indiana, as per IC 6-3-1-3.5(a)(30), the amount of forgiven student loan debt is generally required to be added back to your Indiana adjusted gross income. This means that while your forgiven loan is exempt from federal taxes, it may still be subject to state tax in Indiana.

However, it's crucial to note that there are exceptions, such as if the loan discharge falls under IRC §§ 108(f)(1)-(4), or if the discharge occurred while you were insolvent, as outlined under IRC § 108(a)(1)(B). In these cases, the tax treatment may differ.

Given the nuances of tax law, especially with regards to student loan forgiveness and state-specific regulations, it is advisable to consult with a tax professional. They can provide tailored advice based on the specifics of your loan forgiveness and ensure that you comply with all relevant tax obligations.

Remember, staying informed about the tax implications of your financial decisions is essential to avoid unexpected tax liabilities.

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