Soften the blow of student loan repayments with an up to $2,500 tax deduction. Here's how.

Millions of Americans may feel burdened after restarting student loan payments in 2023, but there may be an upside come tax season. 

Interest on federal student loans began accruing again on Sept. 1 and the first payments were due in October for more than 40 million Americans. If you started repaying, you may be able to take a federal tax deduction on the interest of up to $2,500. And you don’t need to itemize to take it. 

Make sure you know the income limits, who owns the loan and who’s making payments, and if your parents claim you as a dependent. That way you know who, if anyone, can take the deduction. Tripping up on any of these could reduce your tax deduction to zero. 

What are the income limits? 

The write-off phases out as your modified adjusted gross income rises. For tax year 2023, phase-out for single filers begins when modified adjusted gross income is above $75,000 and for joint filers over $155,000. It ends for taxpayers when modified adjusted gross income breaches $90,000 for single filers and $185,000 for joint filers. 

Learn more: Best personal loans

Who can claim the deduction? 

You can claim the deduction if: 

◾ You aren’t married and filing separately. 

◾ No one else is claiming you as a dependent on their tax return. 

◾ You're legally obligated to pay interest on a qualified student loan (your name is on the loan as owner or co-signor). 

◾ You paid interest on a qualified student loan. 

It’s important to note that "if the kid is legally obligated to pay and pays off the loan but the parents or someone else claims them as a dependent, no one gets the deduction,” said Mark Steber, tax preparer Jackson Hewitt’s chief tax officer. 

If parents or someone else makes payments on loans they aren’t legally liable for, they can’t take the write-off. However, the person they made payments for who owns the loan, meets the income limit, and isn’t claimed as a dependent on anyone’s tax return can take the write-off. The IRS treats this as if the money was gifted to the debtor, who then made the payment. 

Early birds get the refunds:Your single largest payday may be a 2023 tax filing away. File early to get a refund sooner

What can be deducted? 

In addition to interest on federal and private loans, you can include: 

◾ Loan origination fee, or the one-time fee charged by the lender when a loan is made. The fee must be used for money, not property or services. It’s treated as interest that accrues over the life of the loan. 

◾ Capitalized interest, or unpaid interest on a student loan that's added by the lender to the outstanding principal balance of the loan. 

◾ Interest on revolving lines of credit, including interest on credit card debt, if the borrower uses the credit only to pay qualified education expenses. 

◾ Interest on refinanced and consolidated student loans, including a single consolidation loan used solely to refinance two or more qualified student loans of the same borrower. If you refinance a loan for more than the original loan and use the extra money for anything but qualified educational expenses, none of the interest will be deductible. 

What cannot be deducted? 

You can’t deduct anything that would be a double benefit. For example, you can’t deduct: 

◾ Any interest paid by your employer under an educational assistance program. 

◾ Any amount paid from a distribution from a qualified tuition plan like a 529 plan because the money withdrawn and used to pay for education expenses was already tax-free. 

What if I received student loan forgiveness?

If you were one of the lucky ones who had all or part of their student loans erased, you don't owe any federal taxes on that forgiveness.

However, be sure to check your state income tax rules. Most states followed the federal government by not taxing student loan forgiveness, but a handful didn't or were still debating.

Indiana, Mississippi, North Carolina and Wisconsin will tax federal student loan forgiveness, and Arkansas was debating it.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.