With the back-to-school season upon is, students and educators alike are preparing for another
academic year. One other thing to prepare for are the financial considerations that come into
play. Here are two key aspects to consider: the dynamic nature of student loans and the
potential for tax savings for educators.
Evolution of Student Loans: From Pandemic Relief to Repayment
The landscape of student loans has experienced significant shifts since President Biden’s initial
declaration of student loan forgiveness during the pandemic. In June, the wide-sweeping
student loan forgiveness concept was struck down in the U.S. Supreme Court causing most
borrowers to face re-payments beginning Sept. 1, 2023.
However in August, some borrowers received emails suggesting possible exemptions from
repayments through Income-Driven Repayment (IDR) plans.
The other crazy piece to the puzzle is that if the loan is forgiven, some states consider the
forgiveness amount as taxable income. If a borrower has debt forgiven, it is treated as if the
borrower earned additional income in the previous tax year equal to the amount of forgiven
debt. For example, if a borrower with an annual taxable income of $35,000 owes $20,000 in
debt that is subsequently forgiven or canceled, the $20,000 in debt is added to their taxable
income for a total of $55,000. Generally, a borrower is provided a 1099-C tax form when debt is
canceled or forgiven, which reports the forgiven amount as taxable income to the IRS and the
taxpayer. Since each state is addressing whether cancelled student loan debt is to be taxed at
the state level, you will need to consider this when filing your tax return as well.
The silver lining remains: the deductibility of student loan interest.
For those repaying student loans, the ability to deduct student loan interest as an above-the-
line deduction is a bit of relief. This deduction decreases your taxable income, thereby
decreasing tax owed. The cap on this deduction is set at $2,500 for the year 2023. It’s important
to note that eligibility for this deduction.
Unmarried individuals who qualify as heads of households or widows/widowers begin
experiencing a phase-out of the deduction at a modified Adjusted Gross Income (AGI) of
$75,000, with the phase-out completing at $90,000.
If you’re married, the phase-out starts at $150,000 and concludes at $180,000.
Educators’ Expenses: From Classroom Investment to Tax Deduction
Educators often invest their own resources to provide the best learning environment for their
students. To alleviate some of these financial burdens, eligible educators can take advantage of
a deduction of up to $300 for qualifying, unreimbursed expenses incurred during the year. For
those who are married and file jointly with another eligible educator, the limit increases to
$600—though each spouse is capped at $300.
This deduction covers a range of expenses directly related to enhancing the classroom
experience such as:
- Books, Supplies, and Materials
- Equipment such as computer equipment to software and services
- COVID-19 Protective Items like face masks, disinfectants, hand sanitizers, and physical
barriers - Professional Development Courses directly connected to their curriculum or student
needs. However, depending on circumstances, it might be more beneficial to claim the
lifetime learning credit.
With the start of a new school, both students and educators are reminded of the financial
considerations that come hand in hand with education. Understanding the nuances can provide
an element of tax relief. As with all deductions and credits, you are encouraged to keep good
records, including receipts, cancelled checks and other documentation.
For more insightful tax tips, read the Franklin County Free Press for our weekly article. You can
also find other tax tidbits by following Saunders Tax on Facebook and Twitter and by following
me, Bev Stitely, on Linked In.
Saunders Tax & Accounting is open Monday through Thursday from 9 am to 5 pm and is
available online at www.SaundersTax.com. Awarded the Hagerstown Chamber of Commerce
“2023 Small Business of the Year”, we have been providing a Less Taxing Life and More
Prosperous Solutions since 1984!
