LOUISVILLE, Ky. (WDRB) -- Indiana residents taking advantage of President Joe Biden's plan to erase up to $20,000 in student debt will face a state tax bill next year that could eclipse $1,000.
The Indiana Department of Revenue on Tuesday confirmed that student debts erased are treated as income under the Hoosier tax code, meaning borrowers who reside in Indiana will owe the state income tax of 3.23% on the balances forgiven, plus an additional rate levied by the resident's home county.
For example, a resident of Clark County, which has a 2% county income tax, would face a total tax bill of $523 for every $10,000 in debt forgiven.
If the debt forgiveness happens in 2022, then borrowers would owe the Indiana tax on their annual tax returns filed in early 2023.
Student debt forgiveness will not be taxed by the federal government, nor by Kentucky. Congress exempted forgiven student debt from federal income tax for the years 2022 through the end 2025 as part of the Democrat-led American Rescue Plan Act of 2021.
The Kentucky legislature earlier this year adopted language matching the state's tax policy to the federal government, which means student debts forgiven are also exempt from Kentucky income tax, according Jill Midkiff, spokeswoman for the Kentucky Finance & Administration Cabinet.
However, the Indiana legislature passed a provision decoupling Indiana from the ARPA tax changes, according to Natalie Rodriguez of the Indiana Department of Revenue.
