Needless to say, taxes and anxiety go hand in hand, whether you are a pro at doing your taxes or a novice. It can especially be an uphill task for a student.
Understanding your student loans and taxes can especially be confusing. Here are three ways how student loans affect taxes, from deductions to the future tax bills you may owe.
Deducting Student Loan Interest from Your Income
If you paid interest on the student loan, you can lower your taxable income by up to $2500.
According to the IRS, you qualify for the full deduction if
- You are filing as a single or head of household with modified AGI of less than $65,000.
- You are married and filing jointly with a modified AGI of $130,000.
You qualify for the reduced amount if your AGI is up to $80,000 (filing singly) or $160,000 (filing jointly).
Keep in mind that it is the borrower, whether it’s the student or parent, who will qualify for the deduction.
Filing Jointly Can Increase Your Student Loan Payment
If you have opted for an income driven repayment plan to pay off your student loans, then it is better to file your taxes separately.
Filing jointly with your spouse will increase your bill as your monthly payment will be based on the two incomes combined.
You Could Be in for a big Tax Bill
You can get your federal student loans forgiven after a few years if you take advantage of the government’s Public Service Loan Forgiveness Plan. You qualify for this plan after you’ve made 120 on-time loan payments while working full-time at a non-profit agency. The forgiven loan is not taxed, later on.
With an income repayment plan, tax has to be paid on forgiven loan balance when the repayment period ends. So with large loan balances, tax liability will increase as well.
Tax Help MD
Are you a student filing your taxes and need help understanding how student loans affect taxes? No need to be stressed! Our tax experts at Tax Help MD are here to answer all your tax queries about student loans and taxes. Call us now on 888-632-4506 and get connected!