LANSING, Mich. — Sen. Rick Jones on Wednesday introduced legislation to ensure disabled combat veterans do not have to pay state income tax on student loan debt that was forgiven due to the veteran’s injuries.
“Apparently the tax collectors at the IRS look at Prince John and the Sheriff of Nottingham from the Robin Hood stories as role models,” said Jones, R-Grand Ledge. “There is a saying that no good deed goes unpunished. A veteran honorably served his country. Due to his service-related disability, a compassionate federal official forgave his student loans. But then comes the cold-hearted IRS demanding the disabled combat veteran pay income taxes on more than $220,000 in forgiven student loans. It’s a disgrace.”
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.
Jones requested the legislation after being contacted by a local veteran who is permanently disabled due to injuries he sustained in combat. Due to his total disability, the Department of Education forgave his outstanding student loans.
However, the IRS treats debt cancellation as income, so 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 basically follows the IRS lead on how debt cancellation is treated, so the state is also asking him to pay $8,000 in state income taxes and fees.
“It’s shameful what our government is doing to this disabled veteran — including garnishing his disability benefits and putting a lien on his house,” Jones said. “Hopefully Congress will act to correct this terrible situation. In the meantime, my bill would provide some relief here in Michigan for disabled combat veterans with forgiven student loan debt.”