How to File Taxes When Your Student Loan Is Being Garnished From Your Paycheck

How to File Taxes When Your Student Loan Is Being Garnished From Your Paycheck
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Do you have student loans you are struggling to pay off or get forgiveness for? You are not alone. Currently At least 42.3 million​ Americans are carrying federal student balances.

Unfortunately, failure to pay your student loans will lead to financial consequences you may not like. So, can student loans take your paycheck? Yes, they can.

Defaulting on your student loan can lead to wage garnishment, which can severely cut into your income. A student loan wage garnishment and taxes connected to this, all of which will be connected to a percentage of your disposable income, are taken from your paycheck after taxes. You'll still use your gross pay when filing and paying your income taxes.

In a sense, it's just like making a voluntary student loan payment, as you do not receive any special tax deductions or credits for the amount garnished from your earnings.

Claiming Taxable Income

You file and pay taxes based on your taxable income, which is your gross income less applicable tax deductions, credits and allowances. Your wage garnishment does not affect your gross pay, but can affect your net pay – the amount left after tax withholding, FICA taxes and other paycheck deductions.

The Department of Education can seize your tax refund until your student loans are paid off. However, you must be notified in advance of the intent to establish any school loan tax offset concerning your refund.

The notification also details your right to appeal the process if you think an error has been made. And if you're married and the debt is yours alone, you may be able to stop your spouse’s tax refund garnishment for student loans payments that belong to you.

Can You Write Off Student Loans?

So, can you write off student loan payments? Unfortunately, you cannot do that easily. Otherwise, everyone would do it.

You can't discharge a federal student loan through Chapter 7 bankruptcy. However, you may be able to set up a monthly payment plan – less than the amount of your wage garnishment – with a Chapter 13 bankruptcy filing.

You can also attempt to rehabilitate the loan by making ​nine​ on-time payments over a ​10-month​ period. Contact your loan holder to determine your eligibility for this option.

Student Loan Interest Deductions

Writing off a student loan interest on your taxes is something you should explore. You may still qualify for student loan tax refund opportunities and interest deductions if your loan is in default status.

You should receive a form from your loan servicer documenting the total interest you paid on the loan for the tax year. If you meet the other requirements, like using the money only for eligible education expenses, you can take the deduction. You can also claim this deduction for other school loans not in default.

Typically, the IRS permits you to deduct your student loan interest or up to ​$2,500,​ whichever is lesser.

Read More​: What Are Interest Expenses?

Filing Your Return

You will continue to use your standard IRS Form 1040 in order to file your annual federal income tax report. Regardless of your wage garnishing, Form 1040 will act as the official report on your adjusted gross income and all student loan wage garnishment and taxes included within it.