How Do Student Loans Factor Into Your Taxes?

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How Do Student Loans Factor Into Your Taxes?

Taxes and student loans are two things that few people want to think about; but, if you have student loans, they are likely to affect your tax bill. Here’s what you should know.

Key Takeaways

  • Student loan interest of up to $2,500 is tax deductible.
  • You may have to pay taxes on the amount forgiven depending on the debt forgiveness program.
  • COVID- The Internal Revenue Service has temporarily changed how certain student loan benefits are calculated as a result of 19 relief initiatives.

Student Loan Interest Tax Deduction

The student loan interest tax deduction is intended to lower your taxable income depending on the amount of student loan interest paid throughout the year. It is vital to remember that you do not get a deduction depending on the amount of payments you have made. Instead, you may only deduct up to $2,500 in interest payments.

The student loan interest tax deduction is an above-the-line deduction, which means it does not need itemization.

How To Qualify for the Student Loan Interest Tax Deduction

To be eligible for the student loan interest deduction, you must complete the following requirements:

If you paid interest on your student loans, your loan servicer will issue you a 1098-E if you paid at least $600 in interest during the year; however, even if you paid less, you may request a 1098-E from your lender or servicer. This paper will detail how much interest you paid on your student loans and how much you may deduct.

A deduction is not the same as a credit. A deduction lowers your taxable income, but a credit lowers the amount of tax you pay. The student loan interest deduction does not reduce your tax burden dollar for dollar.

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Student Loan Forgiveness and Taxes

If you qualify for student debt forgiveness, you may also be required to pay taxes, depending on your circumstances. If your student loan is forgiven or substantially forgiven, but you still have to pay a large tax payment, this might be an unwelcome surprise.

Public Service Loan Forgiveness (PSLF)

Those who qualify for Public Service Loan Forgiveness (PSLF) are exempt from paying taxes on the forgiven amount. You may have your loan balance(s) forgiven without penalty if you fulfill the eligibility conditions of working for an eligible company and making 120 qualifying payments.

Borrowers with FFEL, Perkins, or Direct Loans who have worked for eligible employers must submit a PSLF application by Oct. 31, 2022, to take advantage of a limited PSLF waiver that gives borrowers credit for pay periods that would normally not count toward the 120 qualifying payments required for loan forgiveness.

Income-Driven Repayment Forgiveness

You may be eligible for debt forgiveness after 20 or 25 years, depending on the kind of income-driven repayment plan you choose. The remaining sum is canceled after the minimum period of time on an income-driven repayment plan; however, such cancellation usually comes with a tax charge.

Although income-driven payback forgiveness is generally taxed, the COVID-19 relief package approved in 2021 abolished taxes for this sort of forgiveness until 2025.

As a result, depending on how much is finally forgiven, you might be on the line for tens of thousands of dollars in taxes.

Employer Student Loan Repayment Assistance and Taxes

Some firms provide advantages to their workers, such as assistance with student loan payments. This sort of relief, like certain forms of student debt forgiveness, is frequently taxable. So, if your employer paid you up to $5,000 to assist you repay your student loans this year, that amount would be added to your taxable income. Your taxes would be calculated depending on your entire income.

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COVID-19 relief, like income-driven repayment, has postponed taxes on these sums. If your employer provides student loan repayment help, you will not be taxed on the amount supplied until 2025.

Congress may elect to make these tax benefits permanent, but it’s crucial to take advantage of them now, if possible, in case Congress does not act and you wind up owing taxes later.

Do My Student Loans Affect My Tax Return?

Yes. If you paid student loan interest, you may deduct that amount up to $2,500 from your taxes. Furthermore, certain kinds of debt forgiveness constitute taxable income.

Do Student Loans Count as Income on My Taxes?

Receiving a student loan to assist with college expenses is not considered income for tax purposes. The Internal Revenue Service (IRS) does not normally consider debt to be income, however certain forms of debt forgiveness may be deemed taxable income.

Does COVID-19 Relief Impact My Student Loans and Taxes?

COVID-19 relief has, at least temporarily, altered the way student loans impact your taxes. Forgiveness tied to income-driven repayment is not taxable income until 2025. Furthermore, since interest payments on federal student loans have been suspended, you will most likely be unable to claim the student loan interest tax deduction.

The Bottom Line

Your student loans may affect your tax return. If you’ve paid interest on your student loans, you may be eligible to deduct some of it from your taxable income. Furthermore, certain kinds of debt forgiveness have tax implications. Examine your financial situation and consider contacting with a tax specialist to learn about the tax advantages and drawbacks of your student loans.

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