With over 42 million Americans currently holding a student loan balance, there are many questions that go around them. From its relation to taxes to pay them back, student loans can easily get confusing, especially with all the misconceptions and wrong answers.
Contrary to what some might think, there is a clear connection between student loans and taxes. If you spend your student loan on the expenses that are necessary to pursue higher education, you aren’t liable to pay any tax. That said, student loans are generally not taxable as they are not considered gross income, and you will eventually pay them back.
How student loan becomes gross income
However, there are certain tax implications of student loans. Though taxes are rarely imposed on student loans, you will report it as gross income if you use the student loan funds to pay for travel, room and board, optional equipment, and research.
Employer student loan repayment program
Additionally, there have been some updates to employer student loan repayment programs. The funds received after March 27, 2020, are exempt under this programme, and you won’t report it as gross income.
Student loan deduction
Despite the changes of the student loan you took being reported as gross income in certain events, you can always claim the student loan interest deduction. The Internal Revenue Service allows taxpayers who pay student loans to deduct up to $600. Though this doesn’t have a significant impact on taxes, it’s under the above-the-line deductions.
You will claim the student loan interest deduction using Schedule 1, which you can take along the standard deduction.