What to Know About Filing Taxes with Student Loans in 2023

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Tax time is upon us. If you have student loans, it is possible that these loans may affect your tax return. From getting a tax cut to getting a moratorium on COVID-19 student loans, we’re going to break down what you need to know.

Let’s take a look at how your student loans could affect your taxes in 2023.

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5 Tips to Pay Taxes With Student Loans in 2023

What borrowers need to know about filing taxes with student loans

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If you took out new student loans or made payments on existing loans in 2022, you’ll want to know how to optimize your taxes when you file your tax return in 2023. student loan.

1. Don’t count your student loans as income

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If you took out student loans last year, you don’t count these funds as income when you file your tax return this year. As a student loan borrower, you will be obligated to repay these funds. With this, you don’t need to count that money as income for this year.

If you are receiving a scholarship or fellowship, these funds may or may not be taxable. The distinction will depend on the details of your scholarship. In fact, in 2020 (the year for the most recent data available), over $4.1 billion in scholarships was taxable.

If you use the money for tuition, fees or books, the income generally shouldn’t be taxable. But if you’re using the money to cover room and board, travel, research performed as a service, or optional equipment, that income is generally taxable.

2. See if You’re Eligible to Deduct Some Student Loan Interest

For many borrowers, student loan payments were put on hold through the whole of 2022. However, for borrowers with private student loans and borrowers with non-federal loans such as FFEL loans, you may have paid interest.

Also, if you consolidated your old student loans during 2022, any capitalized interest is considered a “payment” and you’ll report it on your tax return.

You may be able to deduct up to $2,500 in student loan interest paid from your taxable income each year. There are income limits to keep in mind with this option. You cannot earn more than $85,000 as a single filer or head of household or $170,000 if married filing jointly. If you earn more than these income limits, you will not be eligible for this deduction opportunity.

If you’re not sure whether you qualify, tax software like H&R Block will get you through a few simple questions about your student loan payments or 1098-Es to your loan servicer. You can start H&R Block online for free right here >>

3. Research Your State’s Student Loan Forgiveness Tax Rules

If you’re a borrower eligible for student loan forgiveness, this could affect your taxes. The circumstances surrounding your student loan forgiveness will determine whether you owe taxes on the amount forgiven.

It’s important to note that all student loan forgiveness is tax-free for federal income taxes until 2025, but some states still tax forgiven student loans.

Most tax software will tell you what does and does not apply to your state. And if you’re not sure, contact a tax professional.

4. Check Your Eligibility for Education Tax Breaks

You can get many tax exemptions for spending money on your education.

If you paid school-related expenses last year, you may qualify for the Education Tax Credit. Depending on your situation, you can choose to take the American Opportunity Tax Credit or the Lifetime Learning Credit.

These credits can help reduce your federal tax burden by up to $2,500. This is a great tax break.

However, there are income limits and term limits that apply to these credits. Tax software like H&R Block Online can tell you exactly what you’re eligible for based on how much you’ve spent. If you’re not sure how much you spent, keep track of the 1098-T your school will send you in January.

5. Understand the Tax Benefits of Employer Student Loan Repayment

Some employers assist their employees with a tuition reimbursement plan that covers student loan repayment assistance. If your employer offers this opportunity, they can contribute up to $5,250 towards the payment of your student loans each year.

The best part is that these payments are also temporarily tax-free for you. As of now, this opportunity is applicable till January 1, 2026.

Make sure you report this income accurately, as it will be reflected on your W2, but is not considered taxable income.

need help? Talk to a Tax Professional

Tax season probably isn’t your favorite time of year. Unfortunately, the process of gathering documents and filing your taxes isn’t always fun. If student loans are part of your financial picture, you may need help sorting through all your options.

Luckily, you don’t have to go it alone. Instead, you can talk to a tax professional. Competent tax professionals can guide you through the process.

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