It is important to keep your student loans in mind when it is time to file your taxes.
Student loans can impact your federal income tax return.
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You can deduct student loan interest from your income
If you’ve paid interest on your student loans in the last year, then you can deduct up to $2,500 from your taxable income. The IRS uses modified adjusted gross income to determine qualification and for how much.
The deduction is available for whoever took out the loan- student or parent. However, neither will qualify if the student is listed as a dependent on the parent’s tax return. If you paid $600 0r more in interest, whoever collects your bill should’ve sent a Form 1098-E interest statement by early February.
You may still be able to get the deduction if you ask your servicer for the form.
Joint filing could increase your payment
Recent graduates are choosing income-driven repayment (IDR) plans to repay their federal student loans. This plan will cap your payments at a percentage of your income. After 20-25 years of payments, your loan balance will be forgiven.
However, how you file may really impact your payment. If you file jointly with a spouse– the payment is calculated using both of your incomes. Depending on your combined income, it could drive up your monthly payment or disqualify you from some payment plans.
Public Service Loan Forgiveness program
This program also has IDR plans that allow you to have your federal loans forgiven after paying on them for a certain amount of time. However, the two options have different tax outcomes.
After 120 qualifying payments while working full time at a non-profit or government agency, then you’ll qualify for forgiveness. Luckily, the forgiven amount isn’t taxed.
A borrower that is currently enrolled in IDR will have to pay income tax on the forgiven loan balance the year that their repayment period ends.
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