Will You Be Taxed on Your Student Loan Repayment or Forgiveness Amounts?

As with any interest payments and income, student loan borrowers should carefully consider the tax-ability of student loan repayment and forgiveness. If you have entered the repayment period of your loans, you may be eligible for a deduction of your interest expenses on your federal income taxes.

Qualifications and limits regarding your deduction are outlined below. On the other hand, if you have been student loan repayment and find that you are now eligible for forgiveness for all or a portion of your loan repayment, you may suffer repercussions in the form of necessarily reporting a higher income. Still others may be in a situation in which their student loan debt has been cancelled. Whatever your current repayment status, you can find many answers to your tax questions below.

Will You Be Taxed on Your Student Loan Repayment or Forgiveness Amounts?
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Student Loan Interest Deductions

In order to deduct interest payments toward student loan debt on your federal tax return you must have been legally required to pay interest on that loan during the tax year. The loan must also be considered qualified which means that you must have taken out the loan for the sole purpose of paying expenses associated with higher education.

If you are married, your filing status must be married filing jointly. Also, you and your spouse must not be recorded as independents on anyone else’s return. In general, the amount you can deduct will be the lesser of either $2500 or the amount of interest you paid. It is important to note that this deduction may eventually be phased out. You should check the status of this deduction annually.

Reporting Income from Loan Forgiveness

Teachers and public service workers are often granted forgiveness of a portion of student loan debt after a certain period of years of service. Typically, if you have been making required payments toward this loan before forgiveness, then you will need to report the amount of forgiveness as income.

That income should be reported in the year that the forgiveness was enacted. It should be reported as a portion of gross income and will be taxed as such. Exceptions to this rule may be available for health services workers. If you are in public health service or work in an area with a known shortage of health professionals, then you should speak with a tax adviser about the possibility of not reporting a forgiveness as income.

Tax Implications on Canceled Student Loan Debt

If you have Direct Loans or Family Federal Education Loans, your debt may be eligible for cancellation in the event of permanent disability or death, your school was closed before you completed your program, or due to false certification. For the same reasons your Federal Perkins Loans could be canceled.

Perkins Loans may also be canceled for a variety of public service workers in challenging fields. If your loan has been canceled, you may qualify for tax-free treatment of the debt. The requirements for qualification include that the loan was granted by a public institution and that there were provisions in the loan pertaining to cancellation. Eligible institutions include the federal government, state governments, public charities, and certain educational institutions.

Understanding the tax implications of your student loan repayment is important planning your personal finances. If you think you may be eligible for deductions or able to accept the tax-free status of canceled debt, you should speak with a tax professional.

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