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Are Taxes Tied to Paying for Your College Degree?

Getting a college degree is almost a prerequisite for those who are looking for a job. Most people will go thousands or tens of thousands of dollars into debt to pay for their degrees. In addition to impacting a person’s finances, getting a college education may also impact a person’s tax return as well.

Student Loan Debt May Be Tax-Deductible

Those who make student loan payments may be able to deduct up to $2,500 of interest each year. The interest must be reported on a Form W-9s and must be submitted by December of the tax year in which the deduction is being taken. However, the deduction may not be available to those who have an modified adjusted gross income of no more than $80,000. Married couples must stay below $160,000 to qualify.

Forgiven Student Loan Debt May Be Taxable

If you have an income-based repayment plan or other arrangement that caps your monthly payment, the remaining balance may be forgiven after 20 or 25 years. However, the forgiven balance may be seen by the IRS as taxable income. This is generally true unless an individual is considered insolvent or in rare cases that a student loan debt was forgiven because of bankruptcy.

Scholarships Generally Aren’t Taxable

If you receive a scholarship to go to school, that money is generally not subject to state or federal income taxes. This is true if the money is spent on qualifying expenses such tuition or textbooks. Those who receive a scholarship must be students who are working toward a degree. If a scholarship is granted to help to pay for room or board or for general living expenses is generally subject to tax.

Grants Generally Follow the Same Rules as Scholarships

Grants are another form of money that a student can put toward the cost of going to school. While the college or university won’t expect a student to repay that money, the government may collect taxes on it. This is again generally true if the grant was used to pay for living or other general expenses as opposed to tuition or other qualifying expenses.

Work-Study Income Is Generally Taxed

Students who participate in a work-study program are generally required to pay income taxes on the money that they make. However, they may not be required to pay FICA taxes. FICA taxes are used to pay for entitlement programs. This pay is equal to half of the overall 15.3 percent taken out of every paycheck. Individuals in a work-study program may receive this exemption if they are in school full-time and working less than half-time.

Gift Taxes May Be Applicable

Online accounting degrees may be easier to achieve when someone is helping to pay tuition. If a parent or other person helps a student pay tuition or other expenses, that money may be subject to a gift tax. As of 2017, the gift tax exemption is $14,000 per person. In most cases, the person who gives the gift won’t actually pay any taxes.

Instead, that money will be taken from that individual’s lifetime exemption, which is $5.45 million as of 2017. Different rules may apply if the money is given directly to the school as opposed to as to the student. It is important to note that the person who receives the gift is not responsible for reporting it.

There are many different ways in which your tax situation may be impacted by your college debt. Those who have questions about their specific tax situation may be best served by talking to a tax adviser. They may even ask the IRS directly. This may help a person avoid paying penalties or other fees if the government determines that a tax return was not filed correctly.


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