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You don’t have to report student loans on your tax return. In fact, getting an education is more likely to result in a tax break than a tax bill. (Shutterstock)
Do You Have To Claim Student Loans On Taxes
Major life events and financial transactions, such as changing jobs or buying a home, can affect your bills. This also applies to federal and private student loans.
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Whether you’re thinking about taking out student loans, planning to pay them off, or have been making payments on them for a while, this article will walk you through the potential tax consequences of student loans.
If you’re considering student loan refinancing, Credible lets you compare student loan refinancing rates from different lenders in minutes.
When you take out a federal or private loan, you must repay the entire amount with interest. So even if your college or university’s financial award letter calls these loans part of your “award,” they’re not taxable income as far as the IRS is concerned.
Student loans are not taxable income, but other forms of financial aid may be. In general, scholarships, grants, scholarship grants, and tuition reductions are tax-free if they meet the following requirements:
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A portion of your scholarship, grant, or stipend may be taxable if it exceeds your qualified tuition and related educational expenses. For example, if you receive a $20,000 scholarship, but your total tuition, fees, and course-related expenses are only $17,000, the $3,000 difference is taxable income.
You can learn more about the rules for excluding different types of financial assistance from your taxable income in IRS Publication 970.
If you’re new to student loans, you may be surprised to learn that student loans are more likely to result in a tax deduction than a tax burden.
IRS rules allow you to deduct up to $2,500 of student loan interest per tax year. You claim the deduction as an adjustment to income, which means you don’t have to itemize to take advantage of it. You can claim the student loan interest deduction, whether your loans are federal or private, as long as the loans are used for qualified educational expenses, which include:
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You must meet a few rules to take advantage of the student loan interest deduction. First, you must pay interest on a “qualified student loan,” which means you used the loan to pay for qualified educational expenses that were:
The student loan interest deduction is worth up to $2,500, but it is phased out for higher-income taxpayers.
The phaseout begins once your modified adjusted gross income (MAGI) exceeds $70,000 ($140,000 if you file jointly). If your MAGI is $85,000 or more ($170,000 or more if filing jointly), you can’t claim the deduction at all.
MAGI is generally your adjusted gross income (AGI) from your Form 1040, but with a few items added, such as your student loan interest deduction and untaxed foreign income or housing allowance.
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If your income falls within the phase-out range, you calculate your deduction by multiplying the student loan interest ($2,500 repaid) by the fraction. Publication 970 also contains a worksheet to help you calculate your deduction.
If you paid interest on your student loan during the year, you should receive a Form 1098-E from your student loan servicer or lender by late January or early February of the following year. This form shows the amount of interest you paid during the year. The loan servicer also sends a copy of Form 1098-E to the IRS.
It’s important to note that IRS rules require a creditor to send a form only if it earned $600 or more in interest during the year, so you may not receive a Form 1098-E even if you paid the appropriate student loan interest during the year.
If you paid eligible student loan interest and did not receive a Form 1098-E from your loan servicer, check your year-end statement or online statement to determine how much interest you paid and calculate your deduction.
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When your student loans are forgiven, you no longer have to pay back all or part of your loan. The Department of Education offers several student loan forgiveness programs for federal loan borrowers, including those who work in public service or as teachers.
The IRS usually treats forgiven debt as taxable income. For a while, some student loan forgiveness was taxable, while others were tax-free. However, thanks to a provision included in the American Rescue Plan Act of 2021 (ARPA), that is no longer the case — at least for now. ARPA has waived all types of student loan forgiveness until December 31, 2025.
While the student loan interest deduction benefits you after you leave school and start paying off your loan, several tax credits can help you lower your tax bill while you’re still in school.
Here’s a look at each of the education tax credits you need to know about and how to qualify for them.
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The American Opportunity Tax Credit (AOTC) provides a tax credit to help pay for the tuition, fees, and course materials required to attend a college or university for the first four years. It’s worth up to 100% of your first $2,000 and up to 25% of qualified education expenses, for a maximum credit of $2,500.
The AOTC is a partially refundable credit, which means that if it reduces the tax amount to zero, up to $1,000 of the credit will be returned to you.
Although the AOTC is the most generous education tax credit, it also has strict requirements. To qualify, you must be enrolled at least part-time for at least one academic period (such as a semester), and it is only available during the first four years of your undergraduate education.
AOTC also has income limits based on your MAGI. Your MAGI must be $80,000 or less ($160,000 or less if married filing jointly) to claim the full credit. If you are a single taxpayer with a MAGI between $80,000 and $90,000, or married and filing a joint return with your spouse and have a MAGI between $160,000 and $180,000, you are eligible for a partial tax return. Credit. You cannot claim credit if your income exceeds these upper limits.
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The Lifetime Learning Credit (LLC) is another tax credit that can help you pay for college tuition and fees. It’s worth up to 20% of your first $10,000 of qualified education expenses, up to a maximum of $2,000 per return.
Unlike an AOTC, no LLC is refundable. But it’s generally more affordable because it’s not limited to the first four years of your higher education, and you don’t need to be enrolled at least half-time to claim it.
LLC applies only to tuition and required fees paid directly to your college or university. It also has income restrictions. Your MAGI must be $59,000 or less ($118,000 or less if you file a joint return with your spouse) to claim the full credit. You can’t claim the credit if you’re single and have MAGI of $69,000 or more ($138,000 or more if you’re married filing jointly). If your MAGI is in the phase-out range, you may qualify for a reduced credit.
First, while you don’t get a federal tax break for 529 plan contributions, many states provide a tax deduction or tax credit if you contribute to a state plan.
Do You Have To Claim Student Loans On Taxes
Second, the income generated by the account is not subject to federal income tax, allowing your money to grow tax-free.
Finally, as long as you use withdrawals from the plan to pay qualified education expenses, your distributions are not subject to federal or state income tax. Qualified education costs generally include: How can people get out of student loan debt and when is loan forgiveness available? Statistics show how deep in student loan debt US college graduates are, and these amounts can be worrisome for individual borrowers. Fortunately, students can take advantage of income-based repayment plans and forgiveness for public service employees to ease their debt burden.
Only direct loans issued by the federal government and Stafford loans, which were replaced by direct loans in 2010, are eligible for forgiveness programs.
If you have other types of federal loans, you may be able to combine them into one direct consolidation loan, which may give you access to additional income-driven repayment plan options. Non-federal loans from private lenders and loan companies are not eligible for forgiveness.
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In 2020, federal student loan borrowers who attended for-profit colleges and sought loan forgiveness because their school defrauded them or violated specific laws suffered a setback when then-President Donald Trump vetoed a bipartisan resolution that would have repealed the new regulations. Loan forgiveness is much more difficult to access. New, tougher regulations
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