Students loan debt can help former and current students become eligible for tax deductions, but may also be the source of a hefty tax bill. Here, the accounting professionals at Fitzpatrick, Leary & Szarko detail what you should know about student loans and taxes.
Student Loan Interest Tax Deductions
The Student Loan Interest Tax Deduction, on Form 1040, Line 33, is a potential avenue for those with student debt to minimize their taxable income. As it is a deduction and not a credit, your tax burden will be lowered, but your return will not be increased. You can write-off up to $2,500 in loan interest that you have paid, potentially lowering your tax bill by $625.
To qualify, you must have a student loan, explicitly used for educational purposes, that is from a private qualified lender or the federal government. A loan from a family member or friend does not qualify. The loan must also be taken out either by or on behalf of a qualified student: one who is enrolled in, at minimum, a half-time program in a qualified educational institution which will, upon completion, issue a degree, certificate or other recognized credential to the student. Those with a modified adjusted gross income of $160,000 married filing jointly, or $80,000 filing single, do not qualify for the deduction.
Student Loan Tax Burdens
Many former students can qualify for Income-Driven Repayment Plans, which cap monthly student loan payments at 10-15% of their income. After approximately 20-25 years of steady repayment, the remaining student loan balance is often able to be forgiven for qualifying loans. While this can prove a huge benefit to many former students who are deeply indebted, there is an important caveat to consider. To the IRS, forgiven student loan debt qualifies as taxable income. If, for example, you were to pay your student loans for 20 years under the Income-Driven Repayment Plan, and had $50,000 left in student loan debt, this $50,000 could be forgiven, however, it also now counts as taxable income and can substantially increase your tax burden upon filing.
Students who are fortunate to have their loan debt forgiven may also see an increase on their tax bill by thousands of dollars, depending on the amount forgiven. If you find yourself in this situation and are unable to pay the tax bill, you may need to structure a repayment plan with the IRS. Failure to pay or structure a repayment plan can result in fines, hefty amounts of interest, or even jail time. Because of this factor, it is critical to weigh the options of various student loan repayment plans, in order to find the one that works best for your situation.
The thought of repaying student loans can be overwhelming, but with a talented financial expert, there are ways to minimize the burden and maximize returns. At Fitzpatrick, Leary & Szarko, we are dedicated to helping you find solutions for your unique financial situation. Contact us today with any questions or consultation needs!