Student Loan Forgiveness Not Subject to Income Tax in Michigan

Date: September 28, 2022

On August 24, 2022, President Biden announced a student loan relief plan which included one-time student loan forgiveness for eligible borrowers with loans held by the U.S. Department of Education.[1] To provide targeted debt relief to eligible borrowers, the plan authorizes the Department of Education to forgive up to $20,000 in student loans for Pell Grant recipients and up to $10,000 in student loans for non-Pell Grant recipients. Because loan forgiveness typically results in income subject to tax at the state and federal levels, it has been necessary for many states to issue guidance clarifying the potential state income tax consequences, if any, of this relief.

In Michigan, the 4.25% tax imposed on individuals is levied pursuant to the provisions of Part 1 the Income Tax Act.[2] Section 30(1) of the Act provides that the taxable income of an individual begins with their “adjusted gross income as defined in the internal revenue code,”[3] where “internal revenue code” generally refers to the version of the code in effect for that same tax year.[4] Subject to certain statutory adjustments otherwise required under the Income Tax Act,[5] the tax base of an individual in Michigan conforms to the computation of adjusted gross income (AGI) under the provisions of the Internal Revenue Code (IRC) for that tax year.

In this regard, the IRC treats loans forgiven under this plan as excluded from income. Indeed, the American Rescue Plan Act (ARPA) of 2021 inserted IRC 108(f)(5) to exempt the discharge of certain student loan indebtedness occurring between tax years 2021 through 2025.[6] Because IRC 108(f)(5) applies to all loans forgiven by the Department of Education under this student loan relief program, borrowers will neither be required to include the amount of forgiven loans in their federal AGI for the tax year nor be required to pay any additional federal income tax.   

Thus, based on Michigan’s statutory conformity to the IRC — which excludes student loan forgiveness from gross income under IRC 108(f)(5) — student loan forgiveness will not be subject to income tax in Michigan. Because this exclusion will be reflected in federal AGI that is used as the starting point of the Michigan annual tax return, taxpayers will not be required to report these forgiven loans on their Michigan return.