Yes, Student Loans Can Impact Your Taxes. Here’s How.
If you have student loans, you must remember to account for them while filing your taxes. Depending on the specifics of your circumstances, your federal income tax return may be affected by student loans in a variety of different ways. These include lowering your taxable income or preventing you from receiving a refund.
Let’s take a look at 3 ways your student loans impact your income taxes. Here’s what you need to know.
1. You May Qualify for the Student Loan Interest Deduction
The interest you pay on your student loans is deductible. Deducting student loan interest reduces your adjusted gross income (AGI), which may allow you to qualify for various deductions and tax credits that have AGI limits. However, you can only deduct $2,500 in student loan interest, and there are a few other regulations and limitations to consider.
First, if you earn too much, your deduction may be reduced or canceled. If you have a modified adjusted gross income (MAGI) of $70,000 or less as a single filer, head of household, or eligible widow for 2022 tax returns due in 2023, you get the entire deduction (er). The amount doubles to $140,000 for married couples filing a joint tax return.
Your deduction is gradually phased out if your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if married filing jointly). The IRS Publication 970 includes a worksheet to assist you in calculating your deduction; however, if you use tax preparation software to complete your return, the application will calculate the write-off for you.
You can't claim the student loan deduction if your MAGI exceeds the upper phase-out threshold. Here are a few more rules to keep in mind. You cannot deduct student loan interest if you:
- Your filing status is married filing separately
- You are listed as a dependent on someone else's tax return.
- You’re not legally obligated to pay the student loan
Your lender or loan servicer must provide you Form 1098-E, "Student Loan Interest," detailing how much interest you paid if you pay $600 or more in interest on an eligible student loan during the course of the year.
Note: If you don't get this form, you can still find out how much interest you paid by visiting your account online or phoning the company that manages your loan. By putting your eligible amount on line 1 of Schedule 1, which is submitted with your Form 1040, you can deduct the interest paid on student loans. Due to its inclusion on Schedule 1, you can benefit from the deduction even if you don't itemize.
Mid March 2020, when payments were suspended, there was 0% interest levied on federal student loans. If you have federal loans, it's likely that you haven't had any interest to deduct in a while. You might have accrued interest on private student loans as they were not covered by the U.S. Department of Education's student loan payment suspension. On January 1, 2023, the interest and payments on federal student loans are supposed to start up again.
2. Student Loans in Default? Your Refund Could Be Taken by the Treasury Department
If you haven't paid back your federal student loans, the federal government could take your federal tax refund.
The Treasury Offset Program (TOP) takes money from different federal payments to pay off past-due debts that people and businesses owe to state and federal agencies. This includes unpaid child support, state and federal tax debts, and unpaid student loans.
If TOP takes your tax refund, you don't have many ways to get it back.
- Injured spouse: If you're married and file jointly with your spouse, TOP may take your tax refund if they have unpaid student loans. Think about submitting two returns to get around this circumstance. For your portion of the reimbursement if you filed jointly, think about completing Form 8379, Injured Spouse Allocation. If your refund was held up for your spouse's unpaid student debt that they took out before you got married, you would be eligible to be considered “an injured spouse.”
- Collection mistakes: Contact the Department of Education or your loan servicer if you have already paid off your delinquent student loan debt or if you have other reasons for not believing you owe the obligation.
Before submitting your debt to TOP, the Department of Education must provide you 60 days' notice and allow you the chance to negotiate a payment plan or contest the claim.
Check your account on the website of your student loan servicer to determine if you paid interest on your federal or private student loans before you start to file your taxes. Make sure to claim the deduction on Schedule 1 if you satisfy the above-mentioned income requirements.
3. Student Loan Debt Forgiven or Canceled May Not Be Taxable
President Joe Biden has launched a plan allowing tens of millions of debtors to forgive up to $20,000 in federal student loan debt. Although applications for assistance have flooded in, the president's proposal is currently stalled by legal challenges. Generally, the IRS considers canceled or forgiven debt to be taxable income.
However, the American Rescue Plan, a huge COVID-19 aid program approved by Biden in March 2021, permits taxpayers who have federal or private student debts forgiven for any reason from 2021 to 2025 to deduct the debt forgiveness from their taxable income.
For years, several existing student loan forgiveness programs have resulted in tax-free debt forgiveness, including:
- the Public Student Loan Forgiveness program
- the Total and Permanent Disability Discharge Discharge program
- the Borrower Defense to Repayment program
Not all educational loans qualify for the exception, and while some states regard forgiven student debts in the same way as the federal government, not all do. If you have any student loan debt that has been canceled or forgiven, consult with your tax expert about the tax implications.
Check to see whether any of your outstanding student loan debt has been forgiven or canceled by the Department of Education. It is highly recommended that you address the matter with a tax consultant at Vincere Tax in order to verify that the canceled debt is not considered taxable income.
Talk things over with your tax advisor to come up with a strategy that will benefit you the most.
I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.