STUDENT LOAN DISCHARGE; DISABLED VETERANS S.B. 25:
ANALYSIS AS ENACTED
Senate Bill 25 (as enacted) PUBLIC ACT 120 of 2021
House Committee: Tax Policy
RATIONALE
Under the United States Department of Education Total and Permanent Disability Discharge Program, an individual who owes money from certain student loans and is totally and permanently disabled may apply to have his or her Federal student loan debt discharged. The Program can be used by anyone who becomes totally and permanently disabled, including veterans. This allows those individuals to avoid having to repay that debt. However, until recently, the Internal Revenue Code treated student loan debt cancelled under the Program as gross income and, therefore, subject to Federal income tax.[1] Because Michigan's Income Tax Act defines "gross income" as that term is defined under the Internal Revenue Code, some individuals, including veterans who are disabled as a result of service-related injuries, who had tens or hundreds of thousands of dollars in student loan debt forgiven, evidently have received notices to pay tax on that income. To address this issue, it was suggested that, for purposes of Michigan income tax, a disabled veteran be allowed to deduct income resulting from the discharge of a student loan under the Program.
CONTENT
The bill amended the Income Tax Act to allow, for the 2016, 2017, 2018 and 2019 tax years and for each tax year beginning on and after January 1, 2025, a disabled veteran to deduct, to the extent included in adjusted gross income (AGI), income reported on a Federal income tax form 1099-C that is attributable to the cancellation or discharge of a student loan under the Total and Permanent Disability Discharge Program. As used in the bill, "disabled veteran" means an individual who meets either one of the following criteria: a) has been determined by the United States Department of Veterans Affairs to be permanently and totally disabled as a result of military service and entitled to veterans' benefits at the 100% rate; or b) has been rated by the United States Department of Veterans Affairs as individually unemployable.
The bill states that it is intended to be retroactive and the deduction described above would apply retroactively effective for the 2016, 2017, 2018, and 2019 tax years.
The bill took effect December 7, 2021.
ARGUMENTS
(Please note: The arguments contained in this analysis originate from sources outside the Senate Fiscal Agency. The Senate Fiscal Agency neither supports nor opposes legislation.)
Supporting Argument
The Federal government recognizes that when an individual is permanently and totally disabled, he or she is likely to be unable to pay back student loans. Accordingly, the Total and Permanent Disability Discharge Program allows disabled veterans and other individuals to apply for and receive forgiveness for their student loan debt. This is appropriate, especially for veterans who have suffered severe injuries in the course of their service. However, because the Internal Revenue Code, until recently, considered the amounts forgiven as gross income, injured veterans whose debts were forgiven have been subject to relatively large Federal income tax liabilities that are nearly as difficult to pay as the forgiven debt. In addition, because Michigan's definition of gross income generally is the same as the Internal Revenue Code's, these veterans have received relatively large State income tax bills, as well. While much of this has been addressed at the Federal level, it remained the case that a limited number of individuals were not included in the Federal efforts to resolve this issue and still owed substantial State taxes as a result of the forgiven debt. The bill remedies this situation at the State level, by allowing veterans who are disabled as a result of their service and not included in the Federal effort to be relieved of a State tax liability that they cannot afford to pay