The restart of student loan bills last October may have an impact on the 2023 tax filing for borrowers. One positive aspect is that their 2023 tax bill could potentially be reduced due to the student loan interest deduction. This deduction allows qualifying borrowers to deduct up to $2,500 a year in interest paid on eligible private or federal education debt. Before the Covid pandemic, around 13 million taxpayers took advantage of this tax break. However, most borrowers were unable to claim the deduction on federal student loans during the period when student loan bills were paused from March 2020 to October 2023.
Interest on federal student loans started accruing again in September of last year, with the first post-pause payments due in October. This means that borrowers could potentially deduct interest on three or four months’ worth of payments for the 2023 tax year. According to higher education expert Mark Kantrowitz, depending on your tax bracket and the amount of interest paid, the student loan interest deduction could be worth up to $550 a year. The deduction is considered “above the line,” meaning that you do not need to itemize your taxes to claim it. However, there are income limits in place. For individuals, the deduction begins to phase out with a modified adjusted gross income of $75,000, and those with a MAGI of $90,000 or more are ineligible. For married couples filing jointly, the phaseout starts at $155,000, with those having a MAGI of $185,000 or more being ineligible.
Borrowers’ eligibility for the student loan interest deduction may also be affected if their employer made payments on their student loans as a work benefit. Your lender or student loan servicer should provide you with a tax form called a 1098-E, which reports your interest payments to the IRS for the tax year. If you do not receive this form, you should be able to obtain it from your servicer.
Since the Supreme Court blocked President Joe Biden’s student loan forgiveness plan, his administration has utilized existing authority to provide relief to borrowers. Approximately 3.9 million borrowers have had their student loans forgiven, totaling $138 billion in relief. This debt forgiveness has primarily benefited borrowers enrolled in income-driven repayment plans and those in the Public Service Loan Forgiveness program, as well as disabled borrowers and students from low-quality schools. Canceled student debt is typically treated as additional earned income by the IRS, but the American Rescue Plan Act of 2021 has shielded forgiven education debt from federal taxable income until Dec. 31, 2025.
While most borrowers do not need to worry about state taxes on forgiven education debt, it is recommended to check with your state to determine if you need to report the erased debt. Some borrowers who made payments on their debt after they were supposed to receive forgiveness are receiving refunds from the U.S. Department of Education. These payments are not taxable, according to Kantrowitz.
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