Student loans and taxes can seem confusing. The student loans are usually the for-profit kind of loan. They are usually backed by the government. And then there is the income tax.
Student loans themselves do not have a significant effect on your taxable income after graduation. Student loans, regardless of type, do not count as taxable income for purposes of the IRS. They can also be subtracted easily from gross income when it comes to filing taxes. But student loans and taxes can make a significant impact on a person’s life after graduation. Here’s how.
Over the course of a student’s entire college career, she may owe several thousand dollars in student loans. That adds up to several hundred dollars each month. She has to make those payments. In addition, she must also pay taxes on those student loans. Those taxes can add up to even more money over time.
A person who takes out multiple student loans during her entire college career will face the same taxation issues as someone who only takes out one or two. After graduation, she must file her federal income tax returns, state taxes, and take out any other credits or deductions she is entitled to. Then she must continue to make monthly payments to maintain those accounts. If she forgets or does not make a payment for a month, she faces a penalty.
Then she must begin to pay interest on her tax-free education loan. There are several types of education loans – government subsidized, unsubsidized, loan deferred, and student loan subsidized. Each has its own process for calculating taxable income and paying the taxes. She will have to begin making payments again on her subsidized loan as soon as her loan is taxable.
The first installment of her student loans will be interest paid. However, the borrowers may be able to claim a student loan interest deduction on their income tax return. She will have to compute her tax debt ratio by adding her subsidized and unsubsidized student loans and subtracting her interest paid on them. The resulting figure is her taxable student loan interest deduction. She may be eligible to apply it in computing her adjusted gross income (AGI) for purposes of the tax.
She may also be eligible for a tuition and student loan repayment assistance. The U.S. government provides assistance to students who cannot afford the full costs of tuition. In order to qualify, she must meet certain requirements such as not having a loan default, not currently delinquent, and no child who are studying or attend college. She can also get a tax credit for the value of the tuition she used for her tuition and related educational expenses. She must be enrolled at the same college for four years or her tuition and other educational expenses must be included in her income for two years.
Another way to lower her total tax bill while she is attending school is to add her dependents to her student loan. Dependent care assistance is available from the federal government and some state governments. Students can apply for dependent care assistance online through the Education Department or directly with the school they are attending. Student loans are one option, but there is also a waiting period for the dependent student to become eligible for the interest deduction. If she chooses to use her dependent tax deduction, she must pay the taxes her dependent parents paid on her behalf.
One of the easiest ways to help out when filing your tax return is to take a short course in preparing your return. It doesn’t cost much and will save you a lot of time. You do not have to take an expensive tax preparation course, but you do need a basic understanding of tax law. Some people take online courses that are affordable and give them the knowledge they need to prepare an effective tax return. If you have the time and want to learn, a short course is the best choice for you.
If you file jointly as married filing jointly, you can deduct your wife’s income tax. Your dependent care assistance tax credit can be applied to each of you separately. Married individuals can use their personal loan to pay off the other person’s loan if they meet the requirements. They just have to meet the basic qualifications. A student can get a loan at a low rate or even an affordable refinance and can use the money to pay off the other person’s loan.
Dependent care assistance is a great benefit to many taxpayers. It allows a disabled or elderly dependent to be with family and receive necessary medical treatment. The tax deduction can be used to cover most any medical expense. However, it cannot be used to claim items such as: dental expenses, drug costs, hospitalization and rehabilitation. If you claim these items, they must be claimed on your own tax return.