When any type of loan is forgiven, the amount forgiven is called cancellation of debt (COD) and is taxable, unless specifically exempt. As part of the American Rescue Plan of 2021, Congress enacted Section 108(f)(5) of the Internal Revenue Code to expand the types of student loan forgiveness that would not be treated as taxable income for purposes of federal income tax. Loans that are forgiven under The Student Loan Relief Act signed by President Biden on August 24, 2022 qualify for COD tax relief under Section 108(f)(5).
There are 13 states that currently tax COD of student loans. California is of them! However, California legislators have promised to change the state tax code to exempt student loan forgiveness from being taxed. California Assembly Speaker Anthony Rendon and Senate President Pro Tem Toni Atkins tweeted they would “make the relief tax exempt through immediate action in early 2023.”
“Rest assured, one way or another, California will not tax the federal student debt relief,” they said.