Taxes are one of the only certain things in life, right? Since taxes are so applicable and consistent, it is important to understand how each financial choice you make will affect them when it comes time to file. Stress and anxiety surrounding taxes is not uncommon, but it can be alleviated, at least in part, with some forward thinking, and planning. Student loans are also not uncommon, and yes, they play a part in how you file, but it is shocking how many borrowers have no clue about this fact until they are face to face with it. You can research with Earnest.com on how student loans affect your taxes as it applies to things like interest, if your loan qualifies, and income and deduction limits. If you play around with your specific finances and numbers before it comes time to officially file, you will not be sorry. Being prepared for whatever your personal bottom line will be at tax time can result in a true weight lifted.
Is student loan interest deductible? The answer is maybe, as there are eligibility requirements that you must fit into to turn that maybe into a yes. The IRS will look at a modified adjusted gross income to see who qualifies, and for how much. Student loan interest deduction can lower your taxable income by a maximum of $2500 and the borrower who took out the loan will receive the deduction unless the student is listed as a dependent on a parent’s tax return. Also, you cannot claim the student loan interest deduction if your filing status is married filing separately.
If you are not savvy enough to understand these inclusions and exclusions, and additionally how to correctly notate them on your return, it may be worth it to enlist the help of a professional. If terms like, ‘above the line’ and ‘interest deduction phase outs’, are not familiar to you, then at the minimum you would benefit from some online research. Seeking out the help of a professional may come at an out-of-pocket cost to you, however the savings they may be able to unlock for you as it regards to your student loan interest might make it worth it.
The interest on both federal and private student loans is eligible for the student loan interest deduction, which is great news for borrowers who have multiple loans and lenders. Your personal income is also going to play a large role in the size deduction that you can request, regardless of the type, and amount of outstanding loans you have. These income limits as they pertain to the student loan interest deduction change each year, so do not assume that the circumstances that were true on pervious returns can just be carried over and expected year to year. You will have to be aware of the limits as dictated by the IRS annually.
Fine Print Factors
You now know you can research how student loans affect your taxes, but that can be broad. Get past the basic layer of this search to really maximize your benefits, as well as understand better how choices you make all year will impact those potential benefits. If you are on an income-based repayment plan that can be extremely beneficial throughout the year, especially if you struggle to make your student loan payments. Defaulting carries some significant, and long-term penalties that can be difficult and time consuming to rebound from.
The flip side of this, is that forgiven debt is usually taxable. Simply stated, this means that the government considers this a part of your income, and that can exclude you from interest deduction eligibility depends on the limits set for that year. Taking time to consider scenarios such as this will help you to create and plan that strongly supports your financial future as it extends beyond tax season. For example, determining if an income-based repayment plan is or is not right for you as it compares to potential savings by forgoing that plan and being eligible to deduct your student loan interest from your taxes is a scenario you will likely consider and decide on outside of tax season, but understanding how the two will eventually be linked is smart.
Another lesser-known piece of key information is that your lending institution should provide you with a form that helps to track and claim the interest you paid on your loan throughout the year. This is helpful to know because it does take some of the heat off the borrower in terms of having to personally track and manage paid interest totals throughout the year. This is a great way to experience how your loan works for you, instead of the other way around.
Student loan forgiveness also carries some tax implications. Understanding that if you are involved in a scenario where your debt is being forgiven or even cancelled, you will likely have to pay income taxes on that forgiven amount the year that repayment ends. If you do not know this going into it, that can be a shocking reality to face once repayment ends. You can see why knowing things like this up front can be helpful in a scenario like this, you would have time to save for that potential payment instead of having the time window set by the government which will be significantly shorter.
Other Tax Breaks
Now that you understand how interest deductions work as they specifically pertain to your loan, and otherwise financial standings, do some research about other tax breaks that exist for students. Yes, there will be eligibility stipulations, but finding a financial break any way you can will add up to overall savings that you should not miss out on. For example, various types of tax credits for active students can total out to more significant savings that an interest deduction might. And if you are a parent that is considering an educational savings plan for your child different types of plans can also provide some tax benefits.