The answer to that question is, “It depends.”
Uncle Sam isn’t going to charge you, but depending upon what state you live in, you may need to pay state income taxes on the forgiven amount.”
Generally, when debts are forgiven, the amount forgiven counts toward your taxable income. This can increase your bill come April. In this case, the Feds aren’t planning to collect. If you live in Connecticut, Delaware, Illinois, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Rhode Island, Utah, or Vermont, you don’t have to worry as these states use Federal income to factor what you owe them.
Things aren’t so clear with those of you living in Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin. Based on current state tax laws, they will want you to pay taxes on the forgiven amount. We are hopeful that many of these states will scramble to ensure their citizens don’t have to incur a financial burden based on this once-in-a-lifetime largesse from the US government.
Not So Common Cents will be monitoring the situation as it unfolds and will keep you informed.