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Home » News » New York State » Navigating student loan payments and tax deductions: What are your options?

Navigating student loan payments and tax deductions: What are your options?

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  • Staff Report 

In 2023, over 40 million Americans resumed payments on federal student loans. A notable tax benefit awaits them: a federal tax deduction of up to $2,500 on paid interest, without needing to itemize deductions.

This opportunity is subject to certain conditions. Key factors include income limits, loan ownership, payment responsibility, and dependent status on tax returns. Missteps in these areas can eliminate the deduction.

Income Limits: The deduction phases out based on modified adjusted gross income. For single filers, phase-out starts above $75,000 and ends at $90,000. For joint filers, it starts over $155,000 and ends at $185,000.


Eligibility Criteria: To claim the deduction, one must not file taxes as married but separately, not be claimed as a dependent on another’s tax return, and be legally responsible for paying interest on a qualifying student loan.

Special Note for Dependents: As Mark Steber of Jackson Hewitt notes, if a dependent legally responsible for the loan makes payments, no one can claim the deduction.

Payments by Parents or Others: If parents or others pay for a loan they’re not legally liable for, they can’t claim the deduction. However, the loan owner who meets the income and independent status criteria can claim it, as the IRS considers it a gift to the debtor.

What’s Deductible: Deductible expenses include interest on federal and private loans, loan origination fees, capitalized interest, and interest on refinanced and consolidated student loans.

What’s Not Deductible: Deductions are not allowed for employer-paid interest under educational assistance programs or amounts paid from tax-free qualified tuition plans like 529 plans.

Student Loan Forgiveness: Federal tax is not owed on forgiven student loans. State tax rules vary, with states like Indiana, Mississippi, North Carolina, Wisconsin, and potentially Arkansas, taxing the forgiven amount.

Filing early can lead to quicker tax refunds, offering a financial boost to those managing student loans.



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