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What borrowers of student loans should be aware of this tax season
What borrowers of student loans should be aware of this tax season

Education

What borrowers of student loans should be aware of this tax season

 

  • For borrowers of student loans, there have been several recent events, some of which can affect their 2023 tax return.
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  • Here’s what to know.

 

A few recent changes affecting student loan borrowers might have an effect on their 2023 tax return.

Before the April 15 federal tax filing deadline, experts explain what the resumption of the bills and any forgiven debt can imply.

For many borrowers, the tax deduction has returned.

 

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Many debtors can once again deduct their taxes.

For those with student loans whose payments began in October of last year, there could be one silver lining. Their tax payment in 2023 may be a bit less.

 

The interest paid on qualified private or federal student loans can be written off by qualifying borrowers for up to $2,500 annually.

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Approximately 13 million people benefited from the tax exemption prior to the Covid epidemic. However, the majority of borrowers were unable to claim the reduction on their federal student loans from March 2020 until October 2023, when student loan installments were put on hold. (Because the interest rates on those loans were momentarily adjusted to zero, borrowers could not claim any interest that was accruing.)

 

September of last year marked the return of interest on federal student loans, and October was the due date for the first post-pause installments. According to higher education expert Mark Kantrowitz, this implies that borrowers may have interest on three or four months’ worth of payments to deduct for 2023, which might lower their tax obligation.

According to Kantrowitz, the annual value of the student loan interest deduction can reach $550, contingent upon your tax rate and the amount of interest you have paid. Since the deduction is “above the line,” you can claim it without having to itemize your taxes.

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But there are income restrictions.

Individuals with a modified adjusted gross income (MAGI) of $75,000 or less will no longer be eligible for the deduction beginning in 2023, and those with a MAGI of $90,000 or above

would not be eligible at all. The phaseout starts at $155,000 for married couples filing jointly, and those with a MAGI of $185,000 or more are not eligible.

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According to Betsy Mayotte, head of the organization The Institute of Student Loan Advisors, borrowers may not be as eligible for the student loan interest deduction if their employer paid for their student loans as a perk of their employment.

 

A copy of the tax form known as a 1098-E, which your lender or student loan servicer should give you, is how the IRS receives information about your interest payments for the tax year. You should be able to obtain the form from your servicer if you don’t receive it.

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State taxes may apply to forgiven debt.

 

In an effort to leave individuals with less student loan debt, President Joe Biden’s administration has looked at every option available to it since the Supreme Court rejected his expansive plan to erase student loans in June.

 

Nearly 3.9 million borrowers have had their student loan debt forgiven since Biden took office, providing $138 billion in relief.

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Borrowers who are engaged in income-driven repayment programs and those who are pursuing the Public Service Loan Forgiveness program have mostly benefited from this debt forgiveness. Students from low-quality schools and disabled borrowers have also profited.

 

The IRS typically views canceled student loans as additional earned income. But until December 31, 2025, forgiven student debt was exempt from federal taxable income under the American Rescue Plan Act of 2021.

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State taxes are another issue that most borrowers won’t have to worry about because only a few states may charge taxes on debt that has been forgiven for education. Experts advise finding out from your state whether you need to file a report for your debt that has been eliminated.

 

The U.S. Department of Education is returning certain borrowers’ payments that they made on their loan after it was intended to be forgiven. As per Kantrowitz, these payments are not subject to taxes.

 

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Source: CNBC

 

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