Business
What Student Loan Borrowers Need To Know About Filing Taxes In 2023
Tax time is upon us. If you have student loans, it is possible that these debts could impact your tax return. From getting a tax deduction, to the Covid-19 student loan pause, we’re going to explore what you need to know.
Let’s look at how your student loans could affect your taxes in 2023.
What Borrowers Need To Know About Filing Taxes With Student Loans
If you took out new student loans in 2022 or made payments towards existing loans, 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 you are filing taxes with student loans.
1. Don’t Count Your Student Loans As Income
If you took out student loans last year, you don’t count these funds as income when you file your tax return this year. As a student loan borrower, you will be obligated to repay these funds. With that, you don’t have to count that money as income for this year.
If you are receiving scholarships or fellowships, these funds may or may not be taxable. The distinction will depend on the details of your scholarship. In fact, in 2020 (the year of the most recently available data), over $4.1 billion in scholarships was taxable.
If you use the funds for tuition, fees, or books, then the income generally should not be taxable. But if you are using the funds to cover room and board, travel, research performed as a service, or optional equipment, that income is generally taxable.
2. See If You Qualify To Deduct Some Student Loan Interest
For many borrowers, student loan payments were paused throughout 2022. However, for borrowers with private student loans, and those with non-federally held loans like FFEL loans, you may have paid interest.
Also, if you consolidated your old student loans during 2022, any capitalized interest is considered “paid” and you’d report that on your tax return.
You may be able to deduct up to $2,500 in student loan interest you paid from your taxable income each year. There are income limits to keep in mind with this option. You cannot earn more than $85,000 as a single filer or head of household or $170,000 when married filing jointly. If you make more than these income limits, you will not qualify for this deduction opportunity.
If you’re not sure if you qualify, tax software like H&R Block will walk you through some simple questions about your student loan payments or the 1098-E you would have received from your loan servicer. You can start H&R Block Online for free right here >>
3. Research Your State’s Student Loan Forgiveness Tax Rules
If you are a borrower who has qualified for student loan forgiveness, that may affect your taxes. The circumstances surrounding your student loan forgiveness will determine whether or not you’ll have to pay taxes on the forgiven amount.
It’s important to note that all student loan forgiveness is tax-free through 2025 for federal income tax, but some states still levy a tax on forgiven student loans.
Most tax software will walk you through what does and doesn’t apply in your state. And if you’re not sure, reach out to a tax professional.
4. Check Your Eligibility For Education Tax Breaks
There are several tax breaks that you can get for spending money on your education.
If you’ve paid for school-related expenses in the last year, you might qualify for an education tax credit. Depending on your situation, you may choose an American Opportunity Tax Credit or the Lifetime Learning Credit.
These credits could help to significantly decrease your federal tax burden by up to $2,500. That’s a nice tax break.
However, there are income limits and term limits that apply to these credits. Tax software like H&R Block Online can walk you through exactly what you’re eligible for based on how much you spent. If you’re not sure how much you spent, keep an eye out for the 1098-T that your school should send you in January.
5. Understand The Tax Benefits Of Employer Student Loan Repayment
Some employers help their employees with a tuition reimbursement plan that covers student loan repayment assistance. If your employer offers this opportunity, they can contribute up to $5,250 in payments towards your student loans each year.
The best part is that these payments are temporarily tax-free for you as well. As of now, this opportunity is in place until January 1, 2026.
Make sure that you report this income accurately, as it will reflect on your W2, but it’s not considered taxable income.
Need Help? Talk To A Tax Professional
Tax season is likely not your favorite time of the year. Unfortunately, the process of amassing documents and filing your taxes isn’t always fun. If student loans are a part of your financial picture, then you may need help sorting through all of your options.
Luckily, you don’t have to go it alone. Instead, you can talk to a tax professional. Competent tax professionals can guide you through the process.
Editor: Clint Proctor
The post What Student Loan Borrowers Need To Know About Filing Taxes In 2023 appeared first on The College Investor.