Filing Taxes with Student Loans: Top Tax Breaks That Can Help You Get a Bigger Refund

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This story is part Taxes 2022CNET’s coverage of the best tax software and everything you need to file your return quickly, accurately and on time.

More than 43 million Americans have student loan debt and if you are one of them, you may not know that there are some tax credits and deductions you may qualify. As the April 18 With tax deadline fast approaching, you’ll want to know how your student loans can help you get a larger refund or reduce your tax bill.

With federal student loan repayments now on hiatus until August, loan forgiveness being extended to even more Americans in public service positions and rumors of student debt forgiveness circulating, there is plenty to watch this year. Here’s everything you need to know about file your 2021 taxes whether you have student loan debt, including tax relief, how the freeze affects defaulted loans, and why your tax filing status may reduce or increase your monthly student loan payments.

Student loan interest deduction

When you make monthly payments on your student loans, this includes your principal payment plus any accrued interest payments. Whether you have private or federal student loans, the student loan interest deduction allows you to reduce your taxable income by up to $2,500 per year, depending on the amount of interest you paid.

You qualify for the deduction if you paid interest on a student loan in 2021 and your adjusted adjusted gross income (your adjusted income after taxes or qualifying deductions) is less than $70,000 (or $100,000 if you’re married and you are filing jointly). You may qualify for a partial deduction if your MAGI is between $70,000 and $85,000 ($100,000 to $170,000 for those filing jointly).

With federal student loan payments on pause and interest at 0%, you may not have paid any interest in the past year. That said, you must log into your student loan portal and verify Form 1098-E for any qualifying interest payments.

If eligible, this deduction will reduce your taxable income, which could reduce the amount you owe the IRS or increase your tax refund. You could even be placed in a lower tax bracket, which could entitle you to other deductions and credits

US Opportunity Tax Credit

the US Opportunity Tax Credit is available to new students during their first four years of graduate school. It allows you to claim 100% of the first $2,000 of eligible educational expenses, then 25% on the next $2,000 spent, for a total of up to $2,500. If you are a parent, you can claim the AOTC per eligible student in your household, provided they are listed as a dependent.

To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less for married people filing jointly). If your MAGI is between $80,000 and $90,000 ($160,000 to $180,000 for those filing jointly), you may still qualify for partial credit.

The AOTC is a refundable credit, which means that if it reduces your income tax to less than zero, you may be able to get a refund of your taxes or increase your existing tax refund.

Lifetime learning credit

You can get money back for eligible education expenses through Lifetime learning credit. The LLC can help pay for any level of continuing education courses (undergraduate, graduate, and professional degrees). Transportation to college and living expenses are not considered eligible expenses for the LLC.

Unlike the AOTC, there is no limit to the number of years you can claim the credit. You could get up to $2,000 each year or 20% on the first $10,000 of eligible education expenses. However, the LLC is non-refundable, meaning you can use the credit to reduce your tax bill if you have one, but you won’t get any credit back as a refund.

You qualify for this credit if you have qualifying expenses and your MAGI was less than $59,000 ($118,000 for married people, filing jointly). You can claim a reduced credit if your MAGI was between $59,000 and $69,000 ($118,000 and $138,000 for married people, filing jointly).

To note: You cannot apply for both AOTC and LLC for the same student in the same tax year. If you qualify for both, the AOTC generally provides greater tax relief (and may increase your refund).

Loan forgiveness is not taxable (currently)

As a member of $1.9 trillion in COVID relief passed in March 2021, borrowers who receive loan forgiveness no longer owe taxes on the amount forgiven until 2025. Prior to this legislation, most borrowers who received loan forgiveness would be required to pay taxes on the rejected amount. This is great news if you are one of the 70,000 borrowers who received loan forgiveness through the expanded Public Service Loan Relief Program.

Refunds will not be garnished if federal student loans are in default

Normally, if you have federal student loans in default (meaning you are unable to pay what you owe for 270 days), your tax refunds can be used to cover the balance owing. However, this tax season, Federal student loan deferral remains on hold until August 31, 2022. This temporarily suspends student loan payments, interest, and all collection activities, including taking your federal tax refund to pay your delinquent student loans.

Your tax filing status may affect your student loan payments

If you’re repaying federal student loans, including those on an income-based repayment plan, your marital status may impact your payment amount if you’re on an income-based repayment plan. For example, if you are married and filing jointly, your payments are based on the new joint income between you and your spouse. If you are married and file separately, your payments are based on your income only.

The revised Pay As You Earn, or REPAYE, plan does not distinguish between whether you are listed as married filing separately or married filing jointly. Your payments are based on your income and that of your spouse. So if you’re jointly filing for the first time this year, you can expect your monthly payment to increase.

While you can avoid this if you’re married and decide to file separately, you may miss out on other key tax benefits. For example, you may not be able to take advantage of a lower tax rate given to married couples who file jointly, nor will you be able to claim increased credit and deduction amounts available if you file jointly.

More advice on student loans

Garland K. Long