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Student Loans and Your Taxes: How They Work Together

Did you know that your student loans have a big impact on your taxes?

That’s right – your student debt influences whether you should file jointly or separately from your spouse, whether or not you’re taxed on the forgiven portion of your loans, and what type of deductions are available to you if you’ve been paying down the interest on your loans.

When it comes time to file, many young professionals don’t even report that they’ve been paying back their student debt because they’re either:

  1. Unaware that their student loans impact their taxes at all
  2. Unsure of how their loans impact their taxes and are too worried about filing incorrectly to leverage their debt for tax savings

If you fall into either camp, this article is going to walk you through exactly how your loans impact your taxes – and what you can do to reduce monthly payments, lower your taxes, and file with peace of mind this year.

Student Loan Deductions and PSLF

Are you a single filer? Your filing situation is likely much more straightforward than that of a married couple who are both holding student loan debt – so congrats!

The most important thing for you to keep in mind when filing while single is that your student loan interest is deductible from your income up to $2,500. The IRS looks at your MAGI (Modified Adjusted Gross Income) to see if you qualify for this deduction. If your MAGI is less than $65,000, you can deduct the amount of interest you’ve paid whether or not you itemize your taxes. Between $65,000-$80,000, you’re able to take a modified deduction that depends on your exact MAGI.

It’s also important to remember that if your loans are forgiven, you might receive a tax bill for the total amount that was forgiven. However, loans can be forgiven for different reasons – and only some forgiven loans are taxable.

For example, if you qualify for PSLF as a public service employee (this often applies to doctors, social workers, etc.), you have to make 120 qualified loan payments before the loan is forgiven. Once it’s forgiven, the forgiven amount isn’t taxed.

However, if you’re on an income-driven repayment plan, you pay income tax on any forgiven loan balance when your repayment period ends. In these situations, it often makes sense for borrowers to save a little bit extra before their loans are forgiven to be able to pay the tax bill when they file.

How to File If You’re Married

Even if you aren’t a single filer, the student loan deduction and potential tax bill you’ll face if you get your loans forgiven are still tax planning concepts you need to watch out for. However, you also need to plan around whether you want to file as Married Filing Jointly or Married Filing Separately.

Couples filing jointly will often receive a lower tax bill. This is because the IRS offers several tax breaks for couples who file jointly – including a notable standard deduction. However, if you choose to file jointly with your spouse, it’s possible that your monthly student loan payments will increase if you’re on an income-based repayment plan. Because the IRS views your household income as your discretionary income, filing jointly will raise the total income they use to calculate your monthly payment.

Knowing whether to file jointly or separately largely depends on whether you’ve taken the standard repayment plan or are on an income-based repayment plan. Reaching out to a financial planner with an expertise in student loan planning can also help as you try to navigate financial and tax planning with your student loans in mind.

Check Your Loan Status

The final thing you should do, whether you’re single or married, is to check your loan status during your grace period. Occasionally, your loans may qualify to be discharged. This could happen if you have a disability or if your school made a billing mistake (or a mistake when accepting payment form your lenders).

Although this isn’t all that common, loans that are discharged currently aren’t taxable under the recent changes to the tax code. To ensure that discharged loans aren’t taxed, you need to check your tax bill carefully when you file and advocate for yourself to ensure the discharged amount isn’t treated as taxable income. Filing with a CPA who can help you with the specifics of this can be a huge help.

Student loans and taxes are both stress-inducing financial topics. If you need help determining how you should file this year, contact us today for a consultation, or for your one-time student loan analysis session.