Student Loans What They Mean for Your Taxes
If you’re a college or university student (or have been in the past), there’s a good chance that you procured a student loan to cover your tuition costs, and in the interest of taking good care of your finances, both present and future, you’ll want to be aware of what your student loan means to your taxes.
Student loans come with various tax breaks that you want to take advantage of to mitigate the sizable debt you’ve likely taken on, though you’ll also want to watch out for certain filing mistakes related to misunderstandings of student loan issues.
While you may be living off at least part of the money you’ve received in student loans, when filing your taxes, never claim any portion of student loans as actual income. Student loans, no matter what they may contribute to your day-to-day living expenses, are not regarded by the IRS as income unless you make the costly mistake of filing them as such, in which case they will be taxed accordingly (and unnecessarily).
totu. Tax credits are intended to encourage certain behaviors (like pursuing higher education) that promote social and economic benefit, so the government provides a tuition and fees deduction to this end. This deduction can be applied toward your income for up to $4,000, depending on the cost of your education from year to year, and rather than being determined by the amount of loans you take out it’s determined by your tuition costs.
For example, if your yearly tuition costs are $10,000, you can deduct $4,000 from your annual income, which for most people will reduce their tax payment approximately $1,000 (more or less, depending on your tax bracket).
Just as the government provides incentives for taking out a mortgage loan (through tax breaks on the loan’s interest) since it considers homeownership a social and economic benefit, so too does it provide incentives for taking out a student loan.
If you have begun payment on your student loans, it’s important to take this into account when filing your taxes because the IRS will reimburse you for a portion of the interest on them. Provided you make less than $75,000 yearly filing individually or $155,000 filing jointly, you can be eligible for as much as $2,500.
It’s not difficult to report your student loan interest, since at tax season your lender will mail you a statement reflecting exactly the amount of interest you paid in the last tax year on your student loan.
Student loan forgiveness is a dream come true for many people, though it won’t let you off the hook entirely since you may owe taxes on the amount you were forgiven, to the tune of thousands of dollars.
The “gotcha” comes in primarily with income-driven repayment plans like IBR or PAYE, where the amount of your student loan debt that was forgiven is treated like ordinary taxable income. (Yes, it can seem a bit ironic that just earlier we were cautioning against claiming your student loans as income, only to hear several paragraphs later that when these loans are forgiven, the IRS may treat them as just that.) To get further details on this particular “plot twist,” see “Student Loan Forgiveness And Taxes.”
If you default on your student loans, your lender will use every legal avenue to collect payment, and this can mean using a tax offset, which is simply the technical term for garnishing your tax refund.
Tax offsets are levied only on federal student loans where there has been a sustained lapse in payments with prior attempts to collect, so you don’t need to be overly concerned about this happening to you “out of the blue.” Tax offsets are often a “last ditch” resort to collect payment, and if you’re having trouble paying your student loans, student loan rehabilitation can get you back on track.
Whether you’re still a student or are a post-grad in the process of paying off your student loans, when it comes time to file your taxes, you’ll find everything you need here (including free professional tax support) to help you take advantage of the tax breaks that come with the costs of investing in your education.