If you are grappling with repaying the debt owed from current or past student loans, you are certainly not alone. According to 2023 student loan debt statistics, 55% of students from public four-year universities had debt, while 57% of students who attended private four-year universities had debt from student loans. As of 2023, these borrowers had an average of $37,338 in federal student loan debt and $54,921 in private student loan debt, according to the Education Data Initiative, and the total student loan debt in the country – including both private and federal loans – was an estimated $1.75 trillion dollars.
This issue has certainly come into focus in the past few weeks, as after a three-year hiatus due to the Coronavirus pandemic, federal student loan payments resumed in October, forcing an estimated 44 million borrowers to start making regular payments again.
But the good news is that there is relief regarding student loan debt, which comes from your annual tax return preparation.
So, before you get a jumpstart on your income tax preparation for 2023, be on the lookout for these tax breaks for your student loans that can ease the financial burdens.
Deduct the Interest on Your Student Loan
If you are a current or past student, you can take a tax deduction for the interest paid on student loans that were taken out for yourself, your spouse, or your dependent. One of the best aspects of this benefit is that it applies to all loans (not just federal student loans) used to pay for higher education expenses, with a maximum deduction of $2,500 a year.
When it comes to this student loan deduction, there are a few things to keep in mind.
- You don’t need to itemize on Schedule A to take this write-off, and the student loan interest deduction can be claimed as a deduction on Schedule 1 of the IRS Form 1040.
- The break begins to phase out for the tax year 2023, particularly for individual filers with modified adjusted gross incomes above $75,000 and joint tax filers with modified adjusted gross incomes (AGI) above $155,000. This break is not available for individuals with AGIs that are more than $90,000 or married couples filing jointly with AGIs that are more than $185,000.
- There may also be some caveats on who can claim this deduction. For example, parents who give their child money to help pay off their student loans but who aren’t listed on the loan generally can’t take this deduction. A tax preparation expert like Waters Hardy can help you navigate these unique situations and find solutions to minimize your annual taxes.
Avoid Taxes with Qualified Tuition Programs (QTPs) or 529 Plans
A QTP or 529 plan is a tax-advantaged savings plan designed to help pay for college expenses. These plans are sponsored by states, state agencies, or educational institutions and are authorized and managed by Section 529 of the Internal Revenue Code.
Once you’re in college or a higher education institute and withdraw money from your account to pay for your education expenses, the money you withdraw will not be taxed. But there are benefits if you owe student debt, as well! In fact, up to $10,000 of funds from your 529 account can be used to pay off your college loans without having to pay any income tax on the withdrawals. Just note that the $10,000 is a one-time-only lifetime limit, not an annual opportunity.
Student debt forgiven from 2021 through 2025 is generally tax-free when it comes to income taxes.
This newly instituted relief, which was part of the March 2021 stimulus law during the height of the Coronavirus pandemic, is an exception to the rule that the cancellation of debt is still taxable. Instead, the IRS has advised lenders not to issue a 1099-C, or Cancellation of Debt Form, to borrowers whose loans were effectively forgiven during this timeframe, so the discharged debt is not part of your total federal income on your tax return.
Bear in mind, however, that this relief is only on the federal level, and there may be different tax rules for your given state. Therefore, be sure to ask an expert for income tax preparation assistance if student debt forgiveness is part of your year-end financial situation.
Tax Credits to Further Your Education
Maybe you want to get your master’s degree or expand your credentials after graduating from a four-year university. If so, credits are available to further your education long after your college years are over. For example, the Lifetime Learning Credit allows you to claim up to $2,000 per student per year for any college or career school tuition and fees, as well as for books, supplies, and equipment that were required.
This credit can help pay for undergraduate, graduate, and professional degree courses — including courses to acquire or improve job skills – and there is no limit on the number of years you can claim the credit, so it can truly be a lifetime benefit.
Optimize the Tax Breaks for Your Student Loans
Waters Hardy is your best resource in tax planning and preparation. Student loan debt interest, loan forgiveness, and future education expenses are all challenging aspects of federal and state tax laws that constantly evolve, especially in recent years and months.
This is why, when it comes to income tax preparation, you need a resource that understands these waves of changes and how to maximize the potential tax breaks and benefits now available to the millions of Americans who struggle with student debt.
Tax Planning and Preparation with Waters Hardy
If you have questions about student loans, tax breaks, and everything in between, it’s time to reach out to Waters Hardy. Offering tax preparation services in Dallas, TX, and around the country, our team of experts will work diligently on your tax return preparation this year and for many years. Our tax experts ensure that when it comes to student loans and debt, there is ample relief on the horizon that puts money back into your pocket.