How Do Student Loans Affect Your Tax Refund?
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Are you currently attending classes and are taking out student loans to cover the tuition costs? If so, you may have also wondered how this impacts your tax refund. The answer is not all that complex, but you need to understand a few things in order to get a complete picture of the impact that these student loans truly have.
Student loans offer a variety of tax breaks that could apply in certain circumstances, so see if you qualify.
Do Not Label These Loans as Income
While it may feel like an income source sometimes, your student loans should most definitely not be labeled as income on your tax returns. If you do this, then you will actually pay more taxes than you are required, and no one ever wants to do that! However, at the same time, these loans cannot be subtracted from your total income either. So, if you’re taking out $20,000 in student loans this year and your income is $30,000, you cannot simply say that your total earnings are $10,000. This would likely earn you an audit and require you to not only pay extra in the future, but cause many headaches as well.
Due to the nature of these student loans, there is absolutely no impact to your taxable income. There is still some good news though.
Tuition and Fees Deduction
Since the government is very interested in citizens improving their knowledge and potentially earning more money in the future (which would then help the state of the economy), there is a tuition and fees deduction which will reduce your income by up to $4,000, depending on the cost of your classes from year to year. This is not driven by the amount of student loans you take out, but rather is driven by the actual cost of your tuition.
If your college tuition costs are $10,000 for the year, then when it comes time to do your taxes, you can deduct $4,000 off from your income for the year, which will likely reduce your tax payment by
$1,000 (but this ultimately depends on the tax bracket you’re in) or more. This is a great benefit that you should definitely take advantage of.
Student Loan Interest Deduction
Many people know that a house can sometimes be a great investment opportunity, partially because of the tax break on the interest payments. When you buy a house and get a loan at 4% interest, you will actually get some of this money back at the end of the year because the government wants to encourage people to buy houses (which again is good for the economy). The same is true for college loans.
Because the government wants to see people attending college, they offer a similar credit to those that are taking out student loans to fund their college education. If you are starting to pay money on those student loans, then you want to be sure to tell your accountant about it because you will be reimbursed for a portion of those interest payments that you made on your loans.
The maximum benefit is $2,500, and you have to make less than $75,000 per year as an individual, or $155,000 if you’re married.
It’s really easy to report your student loan interest – your lender will mail you a statement right before tax season showing how much interest you paid last year on your student loan debt.
Student Loan Forgiveness And Taxes
If you had some or all of your student loans forgiven last year, you could owe taxes on the amount forgiven. Depending on your student loan repayment plan (mostly income-driven repayment plans like IBR or PAYE), the amount of your student loan debt that was forgiven is considered ordinary income – and you’re going to have to pay taxes on that amount.
Depending on how much student loan debt you had forgiven, this could be thousands of dollars. Be sure to talk to an accountant or tax professional if this applies to you because, under certain circumstances, you may be able to avoid this. Make sure you look at all of your options.Source: thecollegeinvestor.com