Get to know all about filing taxes with student loans; how to qualify for education tax breaks, student loan repayment programs; mistakes to avoid while filing taxes with student loans; etc. An ultimate guide that will help you with filing taxes with student loans for 2023, student loan interest deductions, and much more.
Filing taxes in itself can be tricky sometimes, especially if you have student loans. In the USA, the average student loan debt balance is around $40,904, including federal and private student loans. Under the overwhelming pressure of multiple forms and regulations during filing taxes, you might neglect some of the smart ways you can use your student loans to reduce your taxes. Let us start with understanding how student loans and taxes work and how can you utilize that knowledge for your own benefit.
The Best Way To Understand Student Loans and Taxes In 2023
Technically, your student loans are not your taxable income since you have to eventually pay them back. Therefore, your payment to the student loans consists of both the actual amount of the loan and any other interest on that amount. In that case, the total student loan interest you paid decides how much you can save via student loan interest deduction. This is the same for both private and federal student loans, with some minor differences. According to the Student Loan Interest Deduction article on the IRS site, you get to deduct as much as $2,500 or the interest amount if you qualify for certain criteria.
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Student Loan Repayment Programs and Taxes In 2023
Other than the Student Loan Interest Deduction mentioned above, two more student loan repayment programs can help you get a better result while filing taxes with student loans.
Public Service Loan Forgiveness Program [2023]
Since you get to keep the loan money without getting to pay it back, a student loan forgiveness may be considered a taxable income. However, you can avoid this tax by opting for Public Service Loan Forgiveness Program. Under this program, your forgiven loan does not become taxable if you have already been working for some time under some specific employers.
These employers include all U.S federal, local, or state government agencies. If you work in the US military, public schools, colleges, or universities, your forgiven student loans won’t be counted as taxable income under the Public Service Loan Forgiveness Program. However, this does not work in case you are on an income-driven repayment plan and your loan gets forgiven after you have already paid for 20-25 years. In that case, the IRS will consider that forgiven money as taxable income.
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What About Employer’s Assistance For Student Loan? [2023]
As repaying the student loan not only impacts one’s mental health but also affects work, many employers have special assistance programs to help repay their employees’ student loans. You may check these programs that can help you pay the student loan by direct contribution to the gross repayment.
However, in this case, as you are repaying your loan with your own money anymore, the IRS would count whatever amount your employer pays for the student loan as taxable income. This can lead you to have an extra burden on your tax bills.
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How To Deduct Student Loan Interest? [2023]
As already mentioned, the student loan interest is considered taxable. In that case, you can get a student loan deduction. To qualify for this deduction, your student loan interest payment must be over $600. Following this, your student loan service provider will provide you with a student loan interest statement through Form 1098-E.
Now, you need to understand that the payment towards the principal loan money is not eligible for deducting taxes. Nonetheless, you can have student loan interest under the above-mentioned terms. Suppose you pay $1000 in student loan interest other than the money going for the actual loan. If you successfully opt for the Student Loan Interest Deduction, that $1000 won’t be considered taxable income, reducing your tax bill.
To qualify for this deduction, your MAGI or Modified Adjusted Gross Income must be less than $70,000 if your filing status is single and less than $100,000 if filing jointly. Although because of the pause on student loan interest, you might not have any tax-deductible student loan interest, it is always advised to check for any interests. Most importantly, by identifying these deductible interests, you can qualify for a lesser tax bracket, reducing your taxes.
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A Guide To Filing Taxes With Student Loans Jointly and Separately [2023]
If you have opted for an income-drive student loan repayment plan, only, in that case, the fact that you are filing taxes jointly or separately impacts your taxes. In the income-driven repayment programs, your payments towards a student loan will depend on the adjusted gross income listed on your taxes. If you are the only person having an income, then the payment will be based only on your own income.
On the other hand, if you are married, the payment towards student loans may be affected by you paying jointly or separately. If you are married and choose to pay separately, the payments will be incurred based on your income only.
If you are married and file your tax status jointly, you will have to pay more monthly payments as it will be based on the couple’s total income. Moreover, if both of them have federal student loans, the total chargeable payment based on the sum of their gross income will be divided according to their comparative student loans. However, the fact of whether you pay separately or jointly will not impact your student loans under the REPAYE.
How To Qualify For Education Tax Breaks [2023]
While filing taxes with student loans you have to consider multiple things and one of the important things is to know how to qualify for education tax breaks in the united states. So, let us get to know 2 ways to qualify for an education tax break:
- American Opportunity Tax Credit
- Lifetime Learning Credit
1. American Opportunity Tax Credit
If you are still pursuing your college degree then the American Opportunity Tax Credit (AOTC) would be of much help to you. Any first-time college-goer in the first four years of their higher education can claim AOTC wherein they can get as much as $2,500 annual credit. Actually, you get to claim 100% of the first $2,000 of qualified education expenses and 25% of the second $2,000 of qualified education expenses, therefore making it $2,500 in total credit.
Parents can also get AOTC for each of their children who are still pursuing higher education. Now, in terms of tax breaks, AOTC can help you get a tax refund if it is able to reduce your income tax to be lesser than zero.
2. Lifetime Learning Credit
Like AOTC, Lifetime Learning Credit (LLC) lets you claim money for any qualified education expenses without any restrictions on the years of higher education. For the qualified education expenses, you can claim as much as $2,000 annually or 20% of the first $10,000. However, unlike AOTC, LLC is a non-refundable credit which means LLC can lower reduce your taxes but can’t get you a refund on your taxes.
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5 Mistakes To Avoid While Filing Taxes With Student Loans [2023]
Following are some of the things that you should be clear about while filing taxes with student loans in 2023:
- What If You Are Listed As Dependent?
- Should You File Taxes Separately Or Jointly?
- You Do Not Want To Default On A Student Loan
- Using The 529 plans
- Tax-Free Employer Assistance
1. What If You Are Listed As Dependent?
If someone else is trying to repay your loans and you are registered as a dependent, you won’t be able to deduct any student loan interest from your taxes.
2. Should You File Taxes Separately Or Jointly?
Filing jointly would surely increase the tax bill, but that will also get you the student loan interest deduction.
3. You Do Not Want To Default On A Student Loan
Defaulting on a student loan not only impacts your credit negatively but can also stop your tax refund.
4. Using The 529 plans
Under the 529 plans, also known as qualified tuition plans, one can use those funds for a 100% tax-free claim for any qualified education expenses.
5. Tax-Free Employer Assistance
By paying through a student loan repayment program, an employer can help the employee pay their student loans without adding up to their tax bill.
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How To Apply For Student Loan In 2023?
If you want to opt for a federal student loan, then fill up the Free Application for Federal Student Aid (FAFSA). You should aim for subsidized loans as they are more affordable than the unsubsidized ones. For private loans, you should contact banks or other lenders for their loan services.
Compare best student loan lenders and get to know what they offer, APR, tenure, how they will help you, credit score required, do they offer student loans for bad credit, etc. Still, if you have any questions, feel free to contact us. Our advisors will help clear all your doubts related to filing taxes with student loans, how to apply or any other query.
Frequently Asked Questions
Does Student Loans Affect Tax Return?
Yes. You may deduct up to $2,500 in interest paid on student loans from your taxes. Additionally, some loan forgiveness programs are regarded as taxable income.
Does Student Loans Count as Income on Taxes?
Receiving a student loan to assist with education costs is not regarded as income for taxation purposes. Although some types of debt forgiveness may be regarded as taxable income, the Internal Revenue Service (IRS) generally does not consider debt to be income.
