Tax time is approaching. If you have student loans, these liabilities can affect your tax return. From getting a tax credit to suspending student loans due to Covid-19, we’ll explore what you need to know.
Let’s see how student loans will affect taxes in 2023.
What borrowers need to know about filing taxes on student loans
If you took out a new student loan in 2022 or paid off an existing loan, you need to know how to optimize your taxes when you file your tax return in 2023. student loans.
1. Don’t count student loans as income
If you took out student loans last year, those funds won’t count as income when you file your tax returns this year. As a student loan borrower, you are obligated to repay these funds. That way, you don’t have to count that money as income for the year.
If you receive scholarships or fellowships, these funds may or may not be taxable. The distinction depends on the details of the scholarship. In fact, in 2020 (the year for which the most recent data is available), more than $4.1 billion in scholarships were taxable.
When using funds for tuition, fees, or books, income is generally not taxed. However, if the funds are used to cover room, board, travel, research conducted as a service, or optional equipment, the income is generally taxable.
2. Check if you are eligible to deduct student loan interest
For many borrowers, student loan payments have been suspended through 2022. However, borrowers on private student loans and nonfederal-owned loans, such as FFEL loans, may have paid interest.
Also, if you consolidate your old student loans during 2022, capitalized interest will be considered “paid” and you will report it on your tax returns.
You may be able to deduct up to $2,500 of student loan interest paid each year from your taxable income. This option has income limits to keep in mind. As a single filer or head of household he cannot earn more than $85,000, or if married and filing together he cannot earn more than $170,000. If you exceed these income limits, you are not eligible for this deduction opportunity.
If you’re not sure if you’re eligible, tax software like H&R Block can help you pay your student loans, 1098-E You should have received it from your loan servicer. Get started with H&R Block Online for free here >>
3. Find out your state’s student loan exemption tax rules
If you are a borrower who qualifies for student loan forgiveness, it may affect your taxes. determines whether there is.
It’s important to note that all student loan forgiveness is tax-free until 2025 on federal income tax, but some states still impose taxes on forgiven student loans.
Most tax software will walk you through what is and isn’t applicable to your state. If in doubt, consult a tax expert.
4. Check your eligibility for the education tax credit
There are some tax deductions you can get for spending money on education.
If you paid school-related expenses in the past year, you may be eligible for the education tax credit. Depending on your situation, you can choose American Opportunity Tax Credit or Lifetime Learning Credit.
These credits can help significantly reduce your federal tax burden by up to $2,500. Nice tax cut.
However, these credits have income limits and time limits. Using tax software like H&R Block Online will guide you exactly what you’re eligible for based on how much you spend. If you don’t know how much you spent, look out for the 1098-T your school sent you in January.
5. Understand the tax benefits of your employer’s student loan repayments
Some employers help their employees with tuition reimbursement plans that cover student loan repayment assistance. If your employer offers this opportunity, they can make payments of up to $5,250 each year for your student loans.
The best part is that these payments are temporarily tax-free.For now, this opportunity January 1, 2026.
Please report this income accurately as it will be reflected in W2. However, it is not considered taxable income.
Need help?Talk to a tax expert
Tax season is probably not your favorite time of year. Unfortunately, the process of collecting paperwork and filing your taxes isn’t always fun. If student loans are part of your financial situation, you may need help sorting out all your options.
Luckily, you don’t have to go it alone. Alternatively, you can consult a tax expert. A qualified tax professional will guide you through the process.