How do student loans impact my taxes? This is a very important question that you need to know the answer to. For students with student loans, you need to know about tax time. Student loans impact your federal income taxes in different ways. For instance, you can lose your refund and even decrease your taxable income. But this is based on your current situation.
Unquestionably, student loans are a good financial instrument when it comes to covering educational costs. However, repaying these student loans can be financially stressful, especially after graduating. But what if I told you that there is a way to make this stress lighter using tax credits? So, here is how it works:
When you begin to repay your student loans, you may get a tax break. What’s more, if you are a current student, there are some tax credits that you can check out. Your taxable income can be reduced by $2,500 through student loan payments. Nevertheless, make sure that you check the potential tax breaks before planning anything.
How Student Loans Impact Your Taxes
There are three major ways that student loans can impact your income taxes, and in this section, more details will be learned as we go deeper.
- You may be eligible for the student loan interest deduction.
- The Treasury Department may seize your refund.
- Forgiven or cancelled student loan debt may not be taxable.
• You May Be Eligible for the Student Loan Interest Deduction
The student loan interest tax deduction is to help reduce or decrease your taxable income. However, this depends on how much student loan interest you have paid during the year. This means that you can remove the interest you pay on your existing student loan.
Apart from this, doing this will also decrease your adjusted gross income. Therefore, you can qualify for tax credits as well as other deductions with adjusted gross income (AGI) limits.
In the meantime, there is a limit to the $2,500 you will deduct from your student loan interest and other rules. To begin with, your deduction can be removed or limited if you make too much.
For example, if your tax returns for 2022 are due in 2023, you will receive a complete deduction if you have a modified adjusted gross income (MAGI) of $70,00, probably less.
If your MAGI exceeds the upper phase-out threshold, you will not be able to claim the student loan deduction. Other rules guiding student loan deductions include:
- You cannot claim the student loan interest deduction if you are not required to pay the student loan legally.
- If your filing status is married, file differently.
And lastly, if someone claims that you are dependent on their return.
• The Treasury Department May Seize your Refund
If you fail to pay back your federal student loan, the government can hold onto the federal tax refund you may be expecting. For those who do not know, the Treasury Offset Program (TOP) is responsible for gathering debts from people and businesses that own federal and state agencies. State and federal tax debts and past-due child support are also included. Nonetheless, options to get back your tax refund from TOP are very limited.
• Forgiven or Cancelled Student Loan Debt May Not be Taxable
It was announced by President Joe Biden that a program would be held to forgive about $20,000 in federal student loan debt each for tens of millions of borrowers in the United States. This has caused an increase in the number of applications for relief. However, due to legal challenges, this plan by the president has been held up.
Normally, forgiven or canceled debts are handled like taxable income by the IRS. For instance, if your credit card company agrees to balance your $10,000 with $4,000, the remaining $6,000 of the forgiven debt is considered taxable income.
Student Loan Interest Tax Deduction
As mentioned earlier, the student loan interest tax deduction is created to help you reduce your taxable income. Therefore, depending on how much student loan interest you have paid during the year, whether it will be reduced or not will be determined by this factor. Moreover, you do not need to itemize to claim your student loan interest tax deduction. This is because it is an above-the-line deduction.
How to Qualify
If you would like to qualify for or be eligible for the student loan interest tax deduction, here are the criteria you need to meet:
- Your modified adjusted gross income must be below the threshold set by the IRS every year.
- You must have made interest payments on your student loan.
- Marriage filing must not be part of your filing status.
- You must be legally responsible for making payments for the interest on your student loan.
Hence, if you have paid interest on your student loan, you will receive a 1098-E from your loan provider.
