LANSING, Mich. — Disabled combat veterans would not have to pay state income tax on student loan debt that was forgiven due to the veteran’s injuries under legislation sponsored by Sen. Rick Jones and approved by a Senate committee on Thursday.
“I sponsored this bill after hearing about the disgraceful actions of some cold-hearted IRS tax collectors against a permanently disabled combat veteran who honorably served his country,” said Jones, R-Grand Ledge. “Due to the service-related disability of this local veteran, the federal Department of Education forgave his outstanding student loans.
“It was a great story of compassion, until the IRS crashed the party — demanding the disabled veteran pay income taxes on more than $220,000 in forgiven student loans all at once.”
Senate Bill 642 would ensure that if a veteran is permanently disabled due to combat injuries, and the federal government cancels student loan debt because of that disability, then that debt cancellation will not be counted as income for tax purposes in Michigan.
Since the IRS treats debt cancellation as income, the veteran is being asked to pay federal income taxes on the entire amount. He was able to reduce the loan forgiveness to $161,000, but the federal tax bill remains $62,000.
The state of Michigan follows the IRS on how debt cancellation is treated, so the state is also asking him to pay $8,000 in state income taxes and fees.
“This disabled veteran deserves to be treated with honor — not have his disability benefits garnished and a lien put on his house,” Jones said. “I urge Congress to correct this terrible situation. In the meantime, my bill would ensure that no disabled combat veteran is ever treated like this when it comes to their state income taxes.”