I’m a CPA: 4 Tax Moves Filers With Student Loans Often Overlook
Student loans have a way of trickling into almost all areas of your financial life. They can delay major life choices like purchasing a home or compel you to take on extra side hustles. Of course, they also affect your taxes — or at least your tax strategy.
For You: The Side Hustler’s Guide to Paying Taxes Without Crying (Much)
Learn More: Start Growing Your Net Worth With Smarter Tracking
Your student loans can factor into your tax preparation more than you might think. Overlooking certain tax moves related to those loans can end up costing you real money. MoneyLion knows that your student loans are stressing you out, so we enlisted Brennan Kolar, a CPA and founder of Atlas CPA Index, to explain the tax moves that should be on your radar.
Don’t Assume You’re Getting the Full Deduction — Verify Your Eligibility
You might know that you can deduct student loan interest from your taxes, but before you pop the champagne, Kolar wants you to know that this deduction is more limited than many filers realize — and often misunderstood.
Here’s the real deal: The student loan interest deduction caps at $2,500 annually, and it phases out at certain income thresholds — $85,000 for single filers and $175,000 for married couples filing jointly.
“Those thresholds have not changed in years, which means more borrowers phase out of eligibility every year without knowing it,” Kolar said. “I've worked with filers who assumed they were getting the full $2,500 and never checked whether their income pushed them into the partial or zero range.”
Calculate the Real Tax Impact Before Prioritizing This Break
Kolar recommends running the numbers for your tax bracket before prioritizing this particular tax break. For example, he says that in a 22% tax bracket, the maximum tax savings from the student loan interest deduction is about $550.
“The student loan interest deduction gets most of the attention, but it's not where I see the most money left on the table,” he said.
In other words, you might be better off focusing your energy on higher-impact strategies instead of overvaluing this deduction or assuming it will meaningfully move the needle on your tax bill.
Plan Now for Future Loan Forgiveness Taxes
If you’re one of the many Americans on an income-driven repayment plan like SAVE, PAYE or IBR — and you plan to stay on it for 20 or 25 years — Kolar recommends estimating your potential forgiven balance and the tax bill that could come with it.
“Under the American Rescue Plan, that forgiveness is not treated as taxable income through 2025,” he said. “After that, the default rule kicks back in, and forgiven balances become taxable income in the year of forgiveness.”
He’s seen projected forgiveness amounts of $40,000 to $80,000, which means a person could get hit with a tax bill of $9,000 to $18,000 in a single year, depending on their tax bracket. If you’re not prepared for a bill like that to come out of the blue — and who would be? — it could be financially devastating.
You’re better off setting money aside every year to avoid a large, unexpected hit later. And while the current tax-free forgiveness window is still open, it may be worth exploring whether accelerating forgiveness — if possible — could reduce your long-term tax risk.
Go Back and Claim Missed Deductions — It’s Quick Money
Kolar says many taxpayers are unaware that they can claim missed deductions for up to three prior tax years. To do so, they’ll need to file Form 1040-X, an amended return, and they could potentially recover around $550 per year if they previously missed the student loan interest deduction and were eligible.
“That kind of money in exchange for the 20 minutes it takes to file the amendment electronically is absolutely worth it and something that’s often passed up,” he said.
The Bottom Line
Student loans can impact almost every aspect of your financial life, sometimes even down to your daily spending. It stands to reason that they play a role in your tax strategy. But it’s not all doom and gloom: Understanding how deductions work can potentially put money back in your pocket, while planning ahead for income-driven repayment forgiveness can help you avoid being blindsided by a sudden tax bill.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
More From MoneyLion: