Tax time is just around the corner. If you have student loans, it is possible that these debts will affect your tax return. From the tax deduction to the recent times student loan Break, we’ll explore what you need to know.
Let’s see how your student loans could affect your taxes in 2023.
5 tips for filing taxes with student loans in 2023
1. Don’t count your student loans as income
2. see if you qualify to deduct interest on student loans
3. Research your state’s student loan forgiveness tax rules
4. Check your eligibility for education tax breaks
5. understanding the tax benefits of student loan repayment by employers
What borrowers need to know about filing taxes on student loans
If you took out new student loans or made payments on existing loans in 2022, you’ll want to know how to optimize your taxes when you file your tax return in 2023. Here are five tips to keep in mind when filing taxes with student loans.
1. Don’t count your student loans as income
If you took out student loans last year, don’t count these funds as income when you file your tax return this year. As a student loan borrower, you are required to repay these funds. With this, you don’t have to count this money as income for this year.
If you receive scholarships or fellowships, these funds may or may not be taxable. The distinction depends on the details of your scholarship. In fact, in 2020, more than $4.1 billion in scholarships were taxable.
If you use the funds for tuition, fees or books, the income should generally not be taxable. But if you use the funds to cover housing and meals, travel, research as a service or optional equipment, this income is usually taxable.
2. see if you qualify to deduct interest on student loans
For many borrowers, student loan payments have been suspended throughout 2022. However, for borrowers with private student loans and those with non-federal loans like FFEL loans, you may have paid interest.
If you consolidated your old student loans in 2022, all capitalized interest is considered “paid” and you would indicate this on your tax return.
You may be able to deduct up to $2,500 in interest on student loans that you paid each year from your taxable income. The income limits must be respected with this Option. You can earn no more than $85,000 as a single person or head of a family, or $170,000 if you are married together. If you earn more than these income limits, you are not eligible for this deduction option.
If you’re not sure if you qualify, tax software like H&R Block will walk you through a few simple questions about your student loan payments or the 1098-E you would have received from your loan service provider. You can start H&R Block Online for free here >>
3. Research your state’s student loan forgiveness tax rules
If you are a borrower eligible for student loan forgiveness, this may affect your taxes. The circumstances related to the remittance of your student loan will determine whether or not you have to pay taxes on the amount allocated.
It is important to note that the total forgiveness of student loans is exempt from federal income tax by 2025, but some states still impose a tax on forgiven student loans.
Most tax software will walk you through what applies and what doesn’t apply in your state. And if you are not sure, consult a tax professional.
4. Check your eligibility for education tax breaks
There are several tax breaks that you can get if you spend money on your studies.
If you have paid for school-related expenses in the past year, you may be eligible for an education tax credit. Depending on your Situation, you can choose an American Opportunity tax credit or the lifelong learning credit.
These credits could help significantly reduce your federal tax bill by up to $2,500. It’s a good tax break.
However, there are income limits and term limits that apply to these loans. A tax software like H&R Block Online can explain to you exactly what you are entitled to, depending on the amount you have spent. If you don’t know how much you spent, keep an eye on the 1098-T that your school should send you in January.
5. understanding the tax benefits of student loan repayment by employers
Some employers help their employees with a tuition reimbursement plan that covers student loan repayment assistance. If your employer offers this option, they can make up to $5,250 in payments on your student loans each year.
The best part is that these payments are also temporarily tax-free for you. From now on, this possibility exists until January 1, 2026.
Be sure to declare this income accurately, as it affects your W2 but is not considered taxable income.
