Millions of Americans have student loan debt, but those loans can make matters confusing during tax season. For some people, it allows for a larger refund, while for others, it means a bigger tax bill. In either case, knowing how your student loans impact your taxes is essential for proper tax preparation and filing an accurate return.

Common Questions About Student Loans & Taxes 

Are my student loans tax deductible?  

Anyone who makes student loan payments is eligible to deduct up to $2,500 in interest paid over the last year. This is a great way to lower your taxable income and increase your refund. If your modified adjusted gross income is less than $80,000 when filing single or head of household, or $160,000 when married and filing jointly, you may take the full deduction.

Do I need to report my student loans as income?

Unlike most other forms of income, the IRS doesn’t require private or federal student loans to be reported on your tax return. This is because they’re dispersed with the understanding that you’ll eventually pay them back. Since it’s not money you get to keep, it’s not technically considered income.

Do I have any tax obligations if my loans are forgiven?

If you decide to participate in a debt settlement or loan forgiveness program, the IRS will count the amount that’s been discharged as taxable income. This means you’ll be responsible for reporting what was forgiven on your return and paying taxes on it.

Will my taxes be affected if I default on my loans?

Many people experience financial hardship and find it difficult to continue making their student loan payments. Unfortunately, if you default on your loans, the government can garnish any refund you’re owed as a tax offset to help pay your financial obligation. If you’re married and file jointly, your spouse’s return can also be taken.

For help navigating the complexities of student loans and tax returns, contact Bergamo Tax & Financial Solutions in Watertown, CT. They have extensive knowledge of current tax laws and can explain exactly how to address your debt when filing. Backed by more than 30 years of experience, they offer reliable tax preparation to clients throughout Middlebury, Waterbury, and Litchfield. Call (860) 274-1655 to schedule an appointment, or visit their website for more information on the tax preparation services they provide.