The Daily Money: Student loan tax deductions
Good morning. This is Daniel de Visé with your Daily Money, Sunday Tax Edition.
On Sundays between now and April 15, we'll walk you through what's new and newsworthy in Tax Season 2024.
In today’s edition, we’re going to talk about student loans.
Last fall, millions of Americans faced the unwelcome reality of resuming payments on their student loans.
This spring, they get a chance to reap the upside.
Interest resumed on federal student loans in September, after a lengthy pause, and the first new payments were due in October for more than 40 million Americans.
The good news: If you are repaying a student loan, you may be able to take a federal tax deduction of up to $2,500 on the interest, Medora Lee reports. And you don’t need to itemize.
Before you claim the student loan tax break, make sure you know the income limits, who owns the loan, who’s making the payments, and if your parents claim you as a dependent. That way you know who, if anyone, can take the deduction.
What are the income limits?
The deduction phases out as your income rises. For tax year 2023, the phase-out for single filers begins when modified adjusted gross income is above $75,000 and, for joint filers, over $155,000. It ends at $90,000 for single filers and $185,000 for joint filers.
Who can claim the deduction?
You can claim the deduction if:
◾ Your filing status is anything other than married and filing separately.
◾ No one else claims you as a dependent on their tax return.
◾ You're legally obligated to pay interest on a qualified student loan (meaning that your name is on the loan as owner or co-signor).
◾ You paid interest on a qualified student loan.
What can be deducted?
In addition to interest, you can deduct:
◾ The loan origination fee, or the one-time fee charged by the lender when a loan is made.
◾ Capitalized interest, or unpaid interest on a student loan that's added by the lender to the outstanding principal balance.
◾ Interest on revolving lines of credit, including credit card debt, if the borrower uses the credit only to pay qualified education expenses.
◾ Interest on refinanced and consolidated student loans. However, if you refinance a loan for more than the original sum and use the extra money for anything but qualified educational expenses, none of the interest will be deductible.
What cannot be deducted?
You can’t deduct anything that would be a double benefit. For example, you can’t deduct:
◾ Interest paid by your employer under an educational assistance program.
◾ Any amount paid from a qualified tuition plan, like a 529 plan, because that money was already tax-free.
What if I received student loan forgiveness?
If you were one of the lucky ones who had all or part of their student loans erased, you don't owe any federal taxes on that forgiveness.
However, be sure to check your state income tax rules. Most states followed the federal government by not taxing student loan forgiveness, but a few didn’t.
Read more about the student loan deduction.
About the Daily Money
This has been a special Sunday Tax Edition of The Daily Money. Each weekday, The Daily Money delivers the best consumer news from Paste BN. We break down financial news and provide the TLDR version: how decisions by the Federal Reserve, government and companies impact you.