Student loans are a major stressor for most Americans, with nearly 40 million managing this type of debt. Don’t let ignorance of how student loan payments affect your taxes add to your worries. In fact, there’s some good news for anyone making these payments below, where we examine three of the ways your taxes are impacted by student loans.
Deductions Are Available for Loan Interest Payments
If you pay student loans in a tax year, the interest on your payments may qualify you for a deduction of up to $2,500. Your Modified Adjusted Gross Income will determine how much of the deduction you may take, with individuals earning under $80,000 and couples filing jointly earning under $165,000 receiving the full amount. You may still qualify for a lesser amount if your income exceeds these limits. Those who have paid over $600 will receive Tax Form 1098-E from their loan servicer; if your burden was lower, you may have to request it to get your deduction.
Filing Status May Influence Loan Payment Amounts
Many keep student loan payments manageable by taking advantage of income-driven repayment plans, which base payment amounts on actual income earned. Unfortunately, you can’t ignore that filing jointly with your spouse would likely change your income, possibly even disqualifying you from the plan you intended to use. Consider whether you’re better off filing separately if your joint income would substantially interfere with your ability to make your student loan payments.
Loan Forgiveness Influences Your Taxes
If you are using a loan forgiveness program, the type of program may influence additional taxes owed. For instance, if you are using the Public Service Loan Forgiveness Program, you must make the 120 on-time payments in the program’s criteria, but do not generally owe taxes on the amount forgiven by the program.
The same is not true if you are, on the other hand, using an income-based repayment plan. You may meet very similar criteria, but you’re highly likely to be taxed proportionately to the amount forgiven.
Tax Professionals Can Help You Make The Best of Your Situation
When in doubt, and particularly when the IRS is involved, get a professional opinion before making any major changes to the way you pay your taxes. A qualified tax professional can also help you determine where you can be saving substantially on your taxes and even point out deductions and credits you can take advantage of. At Royal Legal Solutions, our professionals construct your strategy with tax savings in mind, and we also have relationships with CPAs to assist us with complex tax situations.
If you have questions for our tax professionals, contact us today. We are happy to answer any questions you may have about our tax services or the tax implications of our other services. For specific advice on your situation, set up your personalized consultation today.