As if student loans weren’t complicated enough already, student loan debt could also affect your taxes. Let’s take a look at some of the tax considerations surrounding student loans.
2018 Tax Deductions
To be clear, 2018 is the filing year due on Monday, April 15th, 2019. According to Forbes, the Tax Cuts and Jobs Act outlines for 2018 allow you to deduct a maximum of $2,500 for the interest you paid on student loans. However, that deduction begins to phase out if you have a modified adjusted gross income (MAGI) of more than $65,000 (or $135,000 if you file jointly with your spouse) and goes away completely if your MAGI is above $80,000 (or $165,000 if you file jointly). There may be other requirements that can vary from year to year so be sure to consult your tax professional for full details.
2019 Tax Deductions
The updated criteria for 2019 has changed a bit. When you file this year’s tax returns in 2020, the ability to deduct up to $2,500 in student loan interest will remain the same. However, the phaseouts have changed slightly and will begin if you have a MAGI of more than $70,000 (or $140,000 if you file jointly with your spouse) and go away completely if your MAGI is above $85,000 (or $170,000 if you file jointly).
You should receive a 1098-E form from your student loan lender or servicer detailing how much interest you paid during the year.
Student Loan Forgiveness
Student loan forgiveness programs are certainly attractive. After all, who doesn’t want to be freed from the burden of paying back their student loans? However, some student loan forgiveness programs, but not all of them, treat the forgiven amount of the student loan as taxable income.
For example, if you have $50,000 forgiven from an Income Based Repayment (IBR), Pay-As-You-Earn (PAYE), Revised Pay-As-You-Earn (RePAYE), or Income Contingent Repayment (ICR) loan, you will owe income taxes on that $50,000 – and that $50,000 in additional “income” could put you in a higher tax bracket. Depending on the size of the forgiven amount and other tax considerations, you could owe the IRS and/or your state a significant amount of money. You should receive notification from your lender or servicer for any loan forgiveness considered taxable income.
Some of the loan programs that do not treat loan forgiveness as taxable include: Public Service Loan Forgiveness, National Health Service Corps Loan Repayment Program, and Teacher Loan Forgiveness.
Let’s Sum Things Up
The potential impact student loan debt can have on your taxes is real, so it’s smart to plan for it. Each individual’s taxes are unique – and in some cases, can be very complex, often requiring the expertise of a student loan lawyer or a tax professional. Docupop is not a tax service and the information above may only skim the surface of the possible affects your unique debt may or may not have on your taxes. Please consult a tax professional if you are uncertain or need tax advice.