It’s finally fall. Leaves are changing color.
Children and some adults are awaiting trick-or-treat and we are working hard filing tax returns for clients on extension. And student loan payments have resumed… Putting a dent in a lot of people’s wallets after a three-year halt on repaying college debt ended. But these tax breaks can help ease the pain.
There’s a deduction for student loan interest.
And taxpayers needn’t itemize to take this write-off. Up to $2,500 of interest paid each year can be claimed as a deduction on Schedule 1 of the Form 1040. For 2023, the break begins to phase out for single filers with modified adjusted gross incomes above $75,000…$155,000 for joint filers. It ends for taxpayers with modified AGIs over $90,000 and $185,000, respectively. Parents who help a child repay student loans generally can’t take the write-off unless they are also legally liable on the loans. But, even if a parent paid the loan, a child who meets the modified AGI limits can still take the interest deduction, provided he or she isn’t eligible to be claimed as a dependent on the parents’ return. IRS treats this as if the parents gifted money to the child, who then paid the debt.
Most student loan debt forgiven in 2021 through 2025 is tax-free for federal income tax purposes.
This relief, enacted in the March 2021 stimulus law, is an exception to the general rule that cancellation of indebtedness is taxable. IRS has instructed lenders and loan servicers to not issue Form 1099-C to borrowers whose student loans are forgiven during this time period, and the discharged debt is excluded from income. Some states have different rules, which can be confusing.
Up to $10,000 from 529 accounts can be used to help pay off college debt of the account beneficiary without having to pay income tax on the withdrawals. It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty.
Employers that offer qualified educational assistance programs can help. These programs can be used to pay down up to $5,250 of an employee’s college loans each year through 2025. Payments are excluded from workers’ wages for tax purposes.
Starting in 2024, relief can be offered through workplace retirement plans.
A new law will allow employer 401(k) matches conditioned on student loan repayments made by employees. IRS blessed such a program in a 2018 private letter ruling. In that situation, the firm contributed to its 401(k) plan on behalf of employees paying down their college debt. The employer matches took place regardless of whether employees also paid in. Participation was voluntary, and employees had to elect to enroll in the program. Employers have been lobbying Congress for years to enact a statute to allow them to do this without seeking a private ruling from the Service, and lawmakers obliged them last year in the SECURE 2.0 law.