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Filing Taxes With Student Loans: Top Tax Breaks to Get a Larger Refund

Over 43 million carry student debt, so if you’re one of them, you might not realize that you may be eligible for certain tax credits and deductions. April 18 is rapidly approaching, which means it’s time to figure out how your student loans might help you receive a larger refund or lower your taxes.

Deduction for student loan interest

When you make monthly payments on your student loans, the payment covers both the principal and any accrued interest that has accumulated. The student loan interest deduction allows you to reduce your taxable income by up to $2,500 a year, depending on how much interest you paid.

If your MAGI is less than $70,000 in 2021 and your modified adjusted gross income (your adjusted income after eligible taxes or deductions) is less than $70,000 (or $100,000 if you’re married, filing jointly), you are entitled to the deduction. You may qualify for a partial deduction if your MAGI falls between $70,000 and $85,000 ($100,000-$170,000 for those filing jointly).

Because federal student loan payments have been paused and interest has been zeroed out, you may not have paid any interest in the previous year. That said, check your form 1098-E for any eligible interest payments using your student loan portal.

If you’re eligible, this credit will lower your taxable income and may save you money or increase your tax refund. You might be moved to a lower tax bracket, which would allow you to take advantage of other deductions and credits.

American Opportunity Tax Credit

The American Opportunity Tax Credit enables first-time college students to claim 100% of their first $2,000 in qualifying educational expenses and 25% on the next $2,000 spent. For a maximum credit of up to $2,500, you can take advantage of it if you’re a parent.

To receive the full credit, your MAGI must be $80,000 or less ($160,000 or less for those married, filing jointly). You may still qualify for part of the credit if your MAGI is between $80,000 and $90,000.

The AOTC is a refundable credit, which means if your income tax decreased to less than zero as a result of the credit, you may be eligible for a refund or an increase in your current tax return.

Lifetime Learning Credit

The Lifetime Learning Credit allows you to receive a tax refund for qualified educational costs. The LLC can assist pay for any degree level of continuing education (undergraduate, graduate, and professional degrees). Transportation to and living expenses at school are not qualifying expenses for the LLC.

Unlike the AOTC, there is no limit to how long you can take the credit. You may receive up to $2,000 per year or 20% on the first $10,000 of qualifying education costs. The LLC is not refundable, however, so you may use the credit to reduce your income taxes if you have one but do not get any of it back as a refund.

This credit is available to individuals with MAGI of $59,000 or less ($118,000 for married couples filing jointly). If your MAGI was under $59,000 ($118,000 for married couples filing jointly), you may be eligible. You can claim a smaller credit if your MAGM is between $59,000 and $69,000 ($138,000 and $158,000 for married couples filing jointly).

It’s not taxable to forgive a loan (at the moment)

Borrowers who receive loan forgiveness under the COVID provision do not have to pay taxes on the cancelled amount through 2025 as part of the $1.9 trillion COVID relief package passed in March 2021. Prior to this legislation, most borrowers who received forgiveness were required to pay income taxes on the cancelled sum. That’s fantastic news for you if you’re one of the 70,000 individuals who got loan cancellation through Public Service Loan Forgiveness’s expanded program.

If federal student loans are in default, garnishments will not be applied to your refund.

Normally, if you have federal student debt in default (that is, you’ve been unable to pay what you owe on them for 270 days), your tax refunds can be used to help cover the debt. However, through Aug. 31, 2022, the deferment of federal student loans remains in place. This puts student loan payments, interest and any collection efforts, such as taking your federal tax refund to pay your defaulted student loans, on hold until further notice.

Your tax filing status may have an effect on your student loan payments.

Your marital status may have an impact on how much you pay if you’re repaying federal student loans, including those on an income-driven plan. For example, if your combined new joint income is $150,000 or more and you’re married filing jointly, your payments are calculated using that figure. If you’re single and your annual earnings are less than $150,000,

The REPAYE plan, which was introduced in 2020, does not differentiate between married filing separately and married filing jointly. Your payments are based on both your and your spouse’s income. As a result, you can expect your monthly payment to go up if you’re filing jointly for the first time this year.

If you’re married and choose to file separately, you may be able to avoid this. However, you may lose out on other significant tax advantages if you do so. You won’t be able to take advantage of a lower tax rate offered to married couples filing jointly, for example, or claim larger credit and deduction amounts if you file together.