Education data has suggested that the total student loan debt is equivalent to about $1.75 trillion in the United States. If you are one of the students who are paying back their loans, you might be wondering do you have to claim student loans on taxes?
Certain tax breaks and forms are required to be completed during tax time to ensure that you can get all of the benefits you are owed. To start, let’s take a look at whether or not student loans are considered taxable income.
Does the IRS consider student loans taxable income?
The IRS does not consider student loans taxable income because you are required to pay them back.
When financial aid may be taxable
Your financial aid might be taxable if you exceed your qualified education expenses.
These expenses include the following:
- Student activity fees
That said, fees associated with room and board as well as travel expenses are not considered qualified education expenses.
How to qualify for student loan tax deductions
There are a handful of ways to qualify for student loan tax deductions.
Student loan interest deductions
With a maximum of $2,500 in total, you might be eligible for an interest deduction on your student loans. Eligibility will be determined by your tax filing status and your income levels.
For example, if you are single and your adjusted gross income is between $70,000 and $85,000 or you are filing jointly with an adjusted gross income of anywhere from $145,000 to $175,000 together, you would qualify for the student loan interest deduction. However, as with other deductions, there are requirements you must meet.
For starters, the loan must be used for qualified education expenses, the school must be an eligible institution, and the loan must’ve been taken out when the borrower was enrolled, at least part-time, in a program that leads to a degree or certification. The borrower must be the taxpayer or an eligible dependent as well.
Education tax breaks
You could be eligible for an education tax break if you paid for education expenses in the past year. These expenses can be claimed if you or your dependent paid educational fees.
The eligible person must be listed on your taxes. He or she must also be enrolled in an eligible education institution. If you fulfill these requirements, you could qualify for a student loan tax break.
American opportunity tax credit
The American opportunity tax credit, formerly known as the Hope Credit, is eligible for students who have not completed their first four years of higher education. You can get up to $2,500 in tax credit per eligible student if you qualify.
Suppose the credit brings the amount you owe on your taxes to zero. You could have 40% of any remaining amount refunded to you directly, as long as it does not exceed $1,000.
You can claim 100% of the first $2,000 of qualified educational expenses and 25% of the following $2,000 expenses as an eligible student. That said, there are a few requirements to qualify for the American opportunity tax credit.
- You must be pursuing a degree or other recognized education credentials, such as a certification.
- You must be enrolled at least part-time for at least one academic period that began in the applicable tax year.
- You cannot have finished the first four years of a higher education degree or recognized credential at the beginning of the applicable tax year.
- You cannot have claimed the American opportunity tax credit for more than four prior tax years.
- You cannot have a felony drug conviction at the end of the tax year.
Lifetime Learning Credit
The Lifetime Learning Credit is credit available to a much broader audience. This credit can be used to pay for qualified tuition and related expenses related to undergraduate, graduate, and professional degree courses.
This even includes courses to improve your job skills or acquire new ones. This credit is worth up to $2,000 per tax return.
Here are the requirements to qualify for the Lifetime Learning Credit:
- You or your dependent paid educational expenses.
- The eligible person must be listed on your taxes.
- They must be enrolled in an eligible education institution.
Tax-free 529 withdrawals
A 529 savings plan is designed for education expenses. This plan is tax-free and can be used to pay for qualified education expenses. When setting up this plan, a beneficiary is identified, and funds can be used for their expenses.
A withdrawal will be considered tax-free if it is used for qualified expenses. However, suppose the withdrawal is not for qualified expenses. In that case, you are expected to pay income taxes on the withdrawal and a 10% penalty.
What to know about Form 1098-E
A 1098- E form is used to report the interest you paid on student loans in the previous year. You can expect to receive a 1098-E form if you received $600 or more of interest during the year, as required by the IRS.
How student loan forgiveness can affect your taxes
Having your student loans forgiven can be a huge relief, and it does not affect your taxes. Until recently, meaning 2021, students were expected to pay taxes when receiving student loan forgiveness, with a few exceptions.
However, thanks to the COVID relief bill that was passed in 2021, students no longer have to worry about receiving a tax bill after having their loans forgiven. As of now, this change will remain effective and in place through the year 2025.
Student loans and taxes
Student loans can be confusing, and so can taxes. With so many credits or tax options available, make sure you check with your tax preparer before filing to see if you qualify for any student loan tax credit or student loan tax breaks.
You never know… You might be eligible for some great ways to save money or get a larger tax return!
Do I have to put my 1098-E on my tax return?
The IRS requires a 1098-E to be sent if you received $600 or more in interest during the tax year.
Do you have to report student loan refund on taxes?
If your student loan refund is used for purchases outside of qualified educational expenses, it is considered taxable income and must be reported on your taxes.
Does a student loan count as income?
No, your student loans do not count as income because you are required to pay them back.