Mississippi plans to tax student debt relief. But Paycheck Protection Program loans are tax exempt.

by Molly Minta, Mississippi Today
September 2, 2022

Thanks to a longstanding state tax provision, Mississippians who are eligible for the Biden administration's student debt relief will be on the hook for up to $1,000 in additional state income taxes next year.

On the federal level, student debt relief is tax exempt until 2026 due to a provision in the American Rescue Plan Act. But in Mississippi, where the state tax code differs from the federal government's, the Department of Revenue plans to tax student loan forgiveness as income the way it does any form of debt cancellation — as income.

There's a catch: Under guidance from the Internal Revenue Service, student loan servicers are not providing 1099-Cs – the tax form needed for filing debt cancellation – to borrowers or to state tax departments.

This means that many Mississippians will likely never receive the proper form to file student debt relief on their taxes. And while the Department of Revenue said it may send bills to those who try to skirt the additional tax, without 1099-Cs, it likely has no way of knowing if a Mississippian actually received student debt relief.

“That's the big question, right?” said Angela Gonzales, a tax manager based in Gulfport who specializes in student loan taxation. “If you received student loan forgiveness, there's gonna be no transactions through your bank history, no tax documents. So how far are they going to look into this?”

A Mississippi Department of Revenue spokesperson said that “direction has not been received and we are unable to provide a response” when Mississippi Today asked how it would know to send bills to state taxpayers who don't pay the additional tax on student debt relief. 

“I'm not aware of a governmental agency that will give us direction on this,” the spokesperson, Lexus Burns, added. “It is also the taxpayer's responsibility to report their income even if they do not receive the proper documentation.” 

One way lawmakers could solve this issue is by passing a bill to exempt student loan forgiveness from state income taxes – just as they did in 2020 for loans from the Paycheck Protection Program. 

In fact, when it came to PPP loans, lawmakers went a step further than exempting state income taxes — they made them tax deductible. 

Doing the same for student loan forgiveness, though, would require lawmakers to take action quickly in the 2023 session. It's unclear how likely this is as state leaders Gov. Tate Reeves, Lt. Gov. Delbert Hosemann, and House Speaker Philip Gunn have not responded to Mississippi Today's requests for comments.

Mississippi is one of the 13 states that could tax student loan forgiveness, according to the Tax Foundation.

The U.S. Department of Education will open applications for student debt relief in early October, so relief could be coming soon. That could be stymied, though, by Republican attorneys from several states who are working to block the policy through the courts. 

“The fat lady hasn't sung yet,” said Karen Moody, the president of the Mississippi Society of Certified Public Accountants.

Last year, Moody pushed for lawmakers to make PPP loans tax deductible – the logic being that Congress envisioned pandemic relief as a way to help taxpayer's wallets, not penalize. Moody said MSCPA will consider advocating for lawmakers to do the same for student debt relief, but it all depends on if Biden's plan actually goes through. 

“I need to do more research,” Moody said last week. “This is barely out of the president's mouth. But the cancellation of debt, from what I understand, is pretty clear cut.” 

Department of Revenue says taxpayers must report student debt relief

President Joe Biden announced plans in early August to forgive up to $20,000 in student loans for individuals making less than $125,000 a year, partially fulfilling a key campaign promise. The plan was swiftly decried by conservatives as a hand-out and by some progressives who said it didn't go far enough to help low-income and marginalized communities most harmed by the student debt crisis. 

The state Department of Revenue is empowered to tax student loan forgiveness as income under state tax code, even though it's debt held by the federal government. If Biden's student debt relief goes through, the department will calculate a Mississippian's tax bill by adding the amount they received in loan forgiveness to their total gross income. 

Yet it's unclear how Mississippians will know to file student debt cancellation as income. 

Typically, servicers – entities that collect student loan bills and keep track of borrower's payments – send 1099-Cs to any taxpayer that has received more than $600 in student debt forgiveness. But earlier this year, the IRS told servicers they are “not required to, and should not, file a Form 1099-C information return with the IRS or furnish a payee statement to the borrower.” 

Over the last week, Mississippi Today asked the Department of Revenue several questions about how it would tax student loan forgiveness without 1099-Cs. The department initially said it would send an additional bill to taxpayers who don't include student loan forgiveness in the “gross income” category on their taxes. 

“If the taxpayer that receives the cancellation of debt does not include it in his gross income, the DOR may increase the income as filed by the amount of canceled debt and send the taxpayer a bill for the amount due,” Burns, the spokesperson, wrote in an email. 

But Burns couldn't say how the department will know which Mississippians to send these bills to.

Gonzales, the tax manager, speculated that the Department of Revenue could request information from the U.S. Department of Education or even try combing through a borrower's student loan history. But she said that the Department of Revenue typically only audits bank statements which wouldn't show student loan cancellation. 

To be sure, Mississippians who get student debt relief should pay the additional tax even if they don't receive 1099-Cs. Gonzales compared it to a business whose profits are primarily cash. 

“If I have a lawn care business, and I have customers who pay in cash, I'm not gonna receive a form for that but I still have to report that income on my tax return,” she said. “At the end of the day, it is still the taxpayers responsibility to report that income regardless of whether they get a tax document or not.” 

Tax burden will be higher for Mississippians who were Pell Grant recipients in college 

Due to the way Mississippi will calculate income tax next year, the tax burden of student debt cancellation is likely to fall more heavily on borrowers who were eligible for higher amounts of forgiveness. 

Under the Mississippi Tax Freedom Act of 2022, the first $10,000 of a taxpayer's income will not be taxed but any additional income will be taxed at a rate of 5% in 2023. 

At this flat rate, Mississippians who were eligible for up to $10,000 in student loan forgiveness will see $500 in additional taxes. But those who are eligible for up to $20,000 in debt relief – because they came from low-income families and were Pell Grant recipients in college – will be on the hook for even more in taxes – up to $1,000. 

Mississippi's tax policy will also disproportionately affect the increasing number of borrowers – teachers, doctors and nurses among them – who are seeking debt relief through the Public Service Loan Forgiveness program. Under PSLF, borrowers who work for a nonprofit or the government can have their loans discharged after making 120 qualifying payments. 

These Mississippians are facing huge tax burdens because the loans they will have discharged under PSLF can be massive, sometimes hundreds of thousands of dollars. 

One of these Mississippians is Shekiba Brown, an administrator at a state-run nursing home in Long Beach. Brown held odd jobs – at a casino, a pizza shack, a Sonic, the YMCA – throughout college, but the pay was too low to help with tuition. 

By the time she graduated with a bachelor's from William Carey University and a master's from University of West Alabama in 2012, Brown had accumulated more than $127,000 in debt across 27 loans. 

“That was the only choice to get some type of education, for me,” she said. 

Brown signed up for income-driven repayment, but her monthly payments never touched the principal. Around 2014, she learned that as a state employee, she qualifies for PSLF, so she consolidated her loans and signed up for the program, expecting to make her final payment in 2024. 

Last year, Brown logged onto her servicer, FedLoan Servicer, and saw that, unbeknownst to her, she'd had more than $63,000 worth of loans canceled under PSLF. The Department of Education had made changes to the program that allowed some of her previously ineligible payments to qualify. 

Relief washed over her, and for the first time, Brown started to think she would be able to pay off her loans entirely. The discharged loans also improved her debt-to-income ratio, enabling her to buy a townhouse in Long Beach for herself and her two foster kids. 

Then Brown learned from a Facebook group for PSLF recipients that she'd have to pay state income taxes on her forgiven loans – more than $3,000, a sum she couldn't afford. To be able to pay that much in taxes, she'd have to go on a payment plan. 

“It's forgiven, it's like a prize,” Brown said. “I got the reward, but now you're going to punish me for falling in the category of minimum wage, minimum poverty?” 

Lawmakers prioritize tax relief for pandemic funds to businesses, landlords

At the end of last year, at least one state that doesn't conform to the federal tax code took steps to exempt student loan forgiveness from income taxes. In December, Pennsylvania's Department of Revenue announced it would not tax debt forgiveness for PSLF participants.

“These people have chosen to serve the public, and often in lower-paying fields, because they want to make a difference,” Gov. Tom Wolf said. “They don't have thousands of dollars lying around to pay a one-time tax bill. So it's wrong to take what should be a blessing and turn it into just another burden.”

In Mississippi, the Department of Revenue said that any changes to the state tax code would have to come from the Legislature – there is no administrative remedy. But so far, Mississippi lawmakers have focused on providing tax relief to businesses, landlords, and other for-profit entities that received federal pandemic loans. 

In 2020, lawmakers amended the state's definition of “gross income” to exempt from taxes a variety of pandemic relief, including PPP loans, rental assistance for landlords, and small business loans.

But lawmakers have not done the same for pandemic unemployment benefits – relief that, like student loan forgiveness, mainly helped low-income and marginalized communities and was also exempted from federal income tax under ARPA. 

Since the pandemic started, lawmakers have made just one change to taxes on unemployment benefits. In 2021, Reeves signed a bill that allows individuals to elect to withhold state income taxes from their unemployment benefits.

Meanwhile, lawmakers have continued to add exemptions to state income taxes for even more forms of pandemic relief to businesses, like federal emergency assistance to restaurants.

Come next tax season, Gonzales said she thinks that many Mississippians who prepare their own taxes will accidentally not pay income taxes on student debt relief. They won't know to – not without 1099-Cs or the help of an accountant. 

When Brown learned she'd have to pay taxes on her discharged loans, she sought clarification from state lawmakers. She emailed several officials who represent her – Reeves, state Sen. Joel Carter, and state Reps. Richard Bennett and Greg Haney. 

All but Haney ignored her. 

Brown eventually got in touch with the Department of Finance and Administration which told her she needed a 1099-C. But her servicer never sent her the form to file student debt relief on her taxes, so she didn't – no one told Brown she was supposed to anyway. 

“I wasn't hiding that money was forgiven,” Brown said. “I just wasn't given the right information. Not anyone I talked to told me, ‘Even though you don't get the piece of paper that says you need to file it, put it there.' I was never told that I needed to wing it.”

This article first appeared on Mississippi Today and is republished here under a Creative Commons license.