If you have student loans and debt, they will affect your taxes in several ways. Once you start paying off your student loans, you may receive a tax break from the IRS. And if you are still in school, there are several tax credits to reduce your tax liability.
However, depending on your situation, you may also lose a tax refund. This article discusses ways your loan affects your taxes and any tax debt you owe the IRS.
Are Student Loans Considered Income?
Student loans are typically not considered taxable income since you are obligated to pay them back. Remember, most taxable income is from salaries and wages, or other earned income like gambling winnings. If you have a student loan, you don’t need to report the loan as income on your tax return.
Can You Deduct Student Loan Interest on Your Tax Return?
If you have graduated from college and are paying off student loan debt, you may be able to deduct the interest you pay on your student loan each year on your tax return. Whether or not you can make this student loan deduction largely depends on your tax filing status and your income.
The IRS typically allows you to deduct $2,500 or the amount of student loan interest you paid during a given tax year, whichever is less. If you are still attending school and have a student loan, you may also qualify for a lifetime learning credit (LLC) and the American opportunity tax credit (AOTC).
Is Student Loan Forgiveness Taxable?
Under general tax rules, taxes are assessed whenever a debt of any kind, including a student loan, is canceled or reduced. The IRS requires a lender to issue Form 1099-C (Cancellation of Debt) showing the specific amount of student loan forgiveness or debt cancelation. The taxpayer will the report the loan forgiveness amount as “income.”
However, there are some exemptions to this student loan forgiveness rule that could allow the taxpayer to reduce or avoid loan forgiveness taxes altogether.
Can the IRS Seize Tax Refunds to Pay Student Loan Debt?
Yes, the IRS can start collection activities once your federal student loan forbearance ends. This means that any tax refunds you receive can be garnished and used to pay your outstanding student loan debt. However, this doesn’t apply to private student loans with private loans in default.
Under the March 2020 CARES Act, payments on federal student loans and interest were paused until May 1, 2022.
Can the IRS Reverse Tax Credits to Offset Student Loan Debt?
Yes, the IRS can reverse your tax credits if you fall behind on debts owed to the government, including your federal student loan debt. Federal law empowers the agency to use the Treasury Offset Program to withhold your refund in order to repay those debts.
In 2022, however, the IRS will wait until November before it offsets tax credits for student loan debt owed to the U.S. Department of Education.
Can You Get IRS Tax Relief or an Offer in Compromise When You Have Student Loan Debt?
Yes, you can submit an Offer in Compromise if you have student loan debt and owe the IRS more back taxes than you can afford to pay. This offer agreement allows you to pay the IRS less than your total tax debt. If the IRS accepts your OIC, you must commit to meeting all the terms of your offer agreement.
The IRS will only release your federal tax liens and any levies once you fulfill those terms.
Other options to resolve your tax debt when you have student loans include:
- Set Up an Installment Agreement (IA): You can pay your back taxes to the IRS over many months instead of paying one lump sum. This is a monthly IRS payment plan that gives you more time to pay tax debt.
- A Partial Payment Installment Agreement (PPIA): PPIA allows you to make smaller tax debt payments monthly as determined by an approved agreement with the IRS. Compared to AI, a PPIA allows you to only pay back a portion of your tax liability over time.
Student Loan Tax Debt Help
One in five Americans has student loan debt, combined totaling more than $1.7 trillion. If you are part of this student loan group, your student debt impacts your taxes and what you owe the IRS. The good news is that student loans can lower your tax liability if you have loan interest.
Unfortunately, student loans can also wipe away your tax refunds if you default on your payments.
How Can Wiztax Help?
Call us today at (866) 568-4593 to learn more about how we can help. You can also start here to take our free online evaluation. Regardless, we promise to save you thousands in fees.
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