Student Loans and Tax Issues
If you need to take out a student loan to cover the cost of your education, there are going to be a number of questions you will want to ask. One question with important implications is the question of how these loans will impact your filing of tax returns. When analyzing this issue, you will need to distinguish between the initial loan payment by the provider and your repayment of the principal plus interest. How each part of this impacts your taxes is different.
Are Loans Income?
When your student loan provider makes the payment that will allow you to pursue your education, you may tend to believe that this would need to be factored into your tax returns. However, the loans that you have been granted are not deemed to be taxable income by the federal government. This money is borrowed from another party to go toward a specified purpose, and it is treated in the same manner as any other loan. When you go to file income tax returns each year that you have borrowed money for school, remember that what you have received that is toward the overall cost of your education will not be a part of your income for the year.
Tax Issues During Repayment
Although your loans will not impact filing while in school, your student loan repayment schedule may have an impact upon how you file in years to come. Your payments and the interest contained within each payment may afford you a tax deduction to claim. What you can deduct and when will vary depending on several individual factors, and you should be aware of how each detail could impact you.
As you repay your outstanding student loan debt to your creditor, you may be eligible for deduction of your student loan interest. This is done through a deduction category known as 'adjustment to income', an amount that can be equal to any and all interest paid over the course of the previous year up to $2,500. You will likely receive a form known as Form 1098-E from your loan provider that will include on it the sum of your payment toward interest over the past year, allowing you to know just how much you could qualify for in deduction.
Although student loan interest can be deducted by many people, this is contingent on a number of items. The loan that you are seeking to deduct the interest from must be considered a qualified student loan, meaning that it must have been taken out specifically and exclusively to go toward the overall expense of attending school. There is also a limit to how much money you can have made in the past year and still be eligible for this deduction, an amount that the federal government calculates each year. Also, your filing status has an impact on whether or not this can be claimed. Whether or not you are married and thus filing jointly, you must not be claimed as a dependent by anyone else in order to use this deduction.
Taking out a student loan can be a necessary part of receiving the education you need. In doing this, the question of its impact on your income taxes is an important consideration. As you go through school, remember that the money you have borrowed for education will not be deemed taxable income. As you pay back your debt, the interest that has compiled on the principle may qualify toward a tax deduction for you. Make sure that you are aware of how these impact you annually prior to filing any tax return with the government.
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