Personal finance

What student loan borrowers need to know this tax season

Damircudic | E+ | Getty Images

Some of the recent developments for student loan borrowers may impact their 2023 tax filing.

Here’s what the restart of the bills and any forgiven debt may mean ahead of the April 15 federal tax filing deadline, experts say.

For many borrowers, the tax deduction is back

There may be one bright spot for student loan borrowers whose bills resumed last October. Their 2023 tax bill could be a little lower.

The student loan interest deduction allows qualifying borrowers to deduct up to $2,500 a year in interest paid on eligible private or federal education debt.

Before the Covid pandemic, nearly 13 million taxpayers took advantage of the tax break. Yet most borrowers couldn’t claim the deduction on federal student loans during the period student loan bills were on pause, from March 2020 to October 2023. (With interest rates on those debts temporarily set to zero, there was no interest accruing for borrowers to claim.)

Interest on federal student loans began accruing again in September of last year, and the first post-pause payments were due in October. That means borrowers could have interest on three or four months’ worth of payments to deduct for 2023, which may reduce their tax liability, said higher education expert Mark Kantrowitz.

Depending on your tax bracket and how much interest you paid, the student loan interest deduction could be worth up to $550 a year, Kantrowitz said. The deduction is “above the line,” meaning you don’t need to itemize your taxes to claim it.

There are income limits, however.

For 2023, the deduction starts to phase out for individuals with a modified adjusted gross income of $75,000, and those with a MAGI of $90,000 or more are not eligible at all. For married couples filing jointly, the phaseout begins at $155,000, and those with a MAGI of $185,000 or more are ineligible.

Borrowers’ eligibility for the student loan interest deduction may also be reduced if their employer made payments on their student loans as a work benefit, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

Your lender or student loan servicer reports your interest payments for the tax year to the IRS on a tax form called a 1098-E, and should provide you with a copy, too. If you don’t receive the form, you should be able to get it from your servicer.

Forgiven debt may be taxable at the state level

After the Supreme Court blocked President Joe Biden‘s sweeping student loan forgiveness plan in June, his administration has explored all of its existing authority to leave people with less education debt

Since Biden has been in office, almost 3.9 million borrowers have gotten their student loans cleared, totaling $138 billion in relief.

That debt forgiveness has largely gone to borrowers enrolled in income-driven repayment plans and those pursuing the Public Service Loan Forgiveness program. Disabled borrowers and students from schools of questionable quality have also benefited.

Canceled student debt is normally treated as additional earned income by the IRS. However, the American Rescue Plan Act of 2021 shielded forgiven education debt from federal taxable income until Dec. 31, 2025.

Most borrowers won’t have to worry about state taxes, either, as only a handful of states may impose levies on forgiven education debt. Experts recommend inquiring with your state to learn if you need to report your erased debt.

Some borrowers who made payments on their debt after they were supposed to receive forgiveness are being sent refunds by the U.S. Department of Education. These payments are not taxable, Kantrowitz said.

Products You May Like

Articles You May Like

Op-ed: How activist investors are deactivating with proxy battle losses
Two CVS retail stores in Rhode Island join new national pharmacy union
Elizabeth Warren wants more student loan borrowers to know bankruptcy is easier now
Cash discounts, while still rare, are up over 60% from 2015. Here’s how much you can save
Artificial intelligence, great wealth transfer: Why this financial analyst sees a rosy time ahead for stocks

Leave a Reply

Your email address will not be published. Required fields are marked *