Tax day offers a long-awaited payout for some. Others may incur additional costs as a result. Your tax situation might be influenced by a number of things, including your position as a student.
If you paid for qualified educational costs or student loan interest in the previous tax year, you may be eligible for a student loan interest deduction or an education tax credit, which may result in a smaller tax bill or a larger tax refund.
How Student Loans Affect Your Taxes?
You are not required to pay any taxes on your student loan. Student loans are not taxable income because you are required to repay them.
Whether you’re currently in school or have graduated, your student loans may reduce the amount you owe the IRS via the student loan interest deduction, the American opportunity tax credit, and the lifetime earning credit.
The IRS is particularly interested in what you paid in interest to your lender rather than your overall student loan payment. Only the interest you’ve paid off is deductible, not the loan payment itself.
You can deduct either $2,500 or the entire amount of student loan interest paid during the tax year, whichever is less. In other words, this deduction is limited to $2,500.
Read more: 401(k) Withdrawals: How to pay less tax on withdrawals from retirement accounts
Qualifications
Whether you have federal or private student loans, you may be able to take advantage of this deduction.
However, the deduction is structured in such a way that the more money you earn, the less student loan interest you may deduct. When your income hits the IRS limit, the deduction is no longer available.
Each year, the income restrictions for the student loan interest deduction change. They are as follows for the fiscal year 2022:
- When your modified adjusted gross income (MAGI) reaches $70,000, the deduction begins to phase off for singles, heads of households, and qualifying surviving spouses. At $85,000, the deduction is fully eliminated.
- If you are married and file jointly, the deduction phaseout begins when your joint MAGI hits $145,000. If your joint income exceeds $175,000, you no longer qualify for the student loan interest deduction.
Read more: China mission: Moon samples have revealed a new source of water