Student Loan Forgiveness Can Impact Your 2023 Taxes in an Unusual Way
Millions of student loan borrowers are waiting to see how the U.S. Supreme Court will rule on federal student loan forgiveness. In the meantime, taxpayers have some questions.
Since March 2020, federal student loan payments have paused with interest rates set to 0%. Meanwhile, the Biden administration’s plan to cancel up to $20,000 in student loan debt is still on hold.
Your student loans can impact your taxes, but these unusual times leave borrowers unsure of how to handle them.
Student Loan Interest Deduction
You don’t pay money on the amount you owe on student loans; instead, tax benefits are usually available.
Before the pandemic, nearly 13 million taxpayers took advantage of the student loan interest deduction, CNBC reported. This allows borrowers to deduct up to $2,500 annually in interest payments on all higher education loans. It’s not an itemized deduction, which means it’s subtracted from your adjusted gross income
Because federal student loan payments have been paused for the last three years, most borrowers haven’t made any payments toward interest on their debt. This means that federal student loan borrowers don’t qualify for this deduction, higher education expert Mark Kantrowitz explained to CNBC.
If you have student loans that weren’t eligible for the payment pause, you may be able to claim this deduction. Betsy Mayotte, president of The Institute of Student Loan Advisors, said the best way to determine if you qualify for the student loan interest deduction is to contact your loan servicer, CNBC reported.
A Federal Tax Bill Is Unlikely
If the Supreme Court rules in favor of widespread debt relief, borrowers shouldn’t see a federal tax bill next spring, said CNBC. This is because of The American Rescue Plan of 2021, which made student loan forgiveness tax-free through 2025. However, some borrowers may have to pay state taxes on forgiven debt.
Take Our Poll: Do You Think Bankruptcy Is an Acceptable Way To Escape Student Loan Debt?
Tax Cuts: 50% of States Are Pushing for Reductions or Eliminating Taxes Altogether
According to the Tax Foundation, Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin are still on track to tax student loan debt relief as income.
More From GOBankingRates
- Why Stealth Wealth Is the Best Way To Handle Your Money
- Vote for Your Favorite: GOBankingRates' Top 100 Most Influential Money Experts
- 3 Ways to Recession Proof Your Retirement
- 7 Things You Must Do To Create a Plan for Your Money
