LANSING, Mich. — Sen. Rick Jones announced on Monday that he will be turning in legislation to ensure disabled combat veterans do not have to pay state income tax when the government forgives student loan debt due to the veteran’s combat injuries.
“This is like something out of a Dickens novel,” said Jones, R-Grand Ledge. “Only the IRS would be such a cold-hearted Scrooge as to demand that a totally disabled combat veteran pay income taxes on student loan debt that a kinder government official decided to forgive.”
Jones requested the legislation after being contacted by a local veteran who is permanently disabled due to injuries he sustained in combat. The veteran had outstanding student loans of more than $220,000. Due to his disability in the service of his country, the federal government forgave the debt.
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.
The veteran’s story was first chronicled by the Lansing State Journal and then picked up by several state and national publications over the weekend.
Jones’ bill 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.
“This veteran has a lien on his house and is having his disability benefits garnished. It is really shameful that the state and federal governments are making a disabled veteran go through this ordeal,” Jones said. “I hope that Congress acts to correct this terrible situation. In the meantime, my legislation will at least provide relief here in Michigan for disabled combat veterans with forgiven student loan debt.”