You may be eligible to claim a student loan interest deduction if you took out student loans to cover educational expenses. This tax break allows eligible borrowers to deduct up to $2,500 paid interest from their annual taxable income.
What Is Student Loan Interest Deduction?
Student loan interest refers to the interest you’ve paid on an eligible student loan during a one-year period. It includes both, mandatory and voluntary pre-paid interest payments.
You are allowed to deduct either $2,500 or the actual interest amount paid for the year, whichever is lesser. The deduction is reduced gradually. Eventually, it is eliminated when your modified adjusted gross income equals your annual limit. The annual limit is based on your filing status.
Here’s how it works:
- Borrowers can deduct up to $2,500 of the interest paid on a student loan for higher education. This can be done directly on Form 1040.
- If you paid less than $2,500 interest for the year, your deduction will be capped at the actual amount of interest paid.
- You may not be eligible to claim a student loan interest deduction starting mid-2020 onwards. This is because student loan payments and interest accrual have both been suspended starting in mid-2020 and are ongoing. You may only be able to claim student loan interest deductions on personal loans during this period.
Student loan interest deduction can be claimed as an income adjustment. Under these circumstances, your deductions don’t need to be optimized
You claim this deduction as an adjustment to income, so you don’t need to itemize your deductions.
Who Can Claim Student Loan Interest Deduction?
Your income level and filing status are two of the main factors that determine your eligibility for deduction. You can claim a student loan interest deduction if you meet all of these criteria:
- You took the student loan for yourself, your spouse, or your dependent to pay for qualified higher education expenses. Qualified expenses include tuition, fees, books, room, board, and transportation.
- You paid interest on a qualified student loan for that tax year.
- You’re legally obligated to repay the loan. You can’t claim an interest deduction for contributions to your child’s student loan. This is because the loan is in your child’s name and not in your name.
- Your modified adjusted gross income is less than a specified amount, which is set annually.
- You’re not listed as a dependent on another person’s tax return.
- You’re married and filing joint taxes. You cannot claim a deduction if you’re married but filing taxes separately
- If you’re filing joint taxes, neither you nor your spouse is claimed as dependent on another person’s return.
If you meet all the criteria above, you can get a maximum interest deduction of $2,500 per year.
An important distinction to make is that this is not a tax credit. This is a tax deduction. Tax deductions are different from tax credits. With deductions, you subtract the deductible interest amount from your taxable income so it directly reduces the amount of taxes you owe.
What You Should Know About Income Limits
Student loan interest deduction phases out gradually as you earn a higher income. The income limits vary based on your filing status as well as your modified adjusted gross income (MAGI).
1. If you’re single or head of the household
You’ll qualify for the full deduction as long as your MAGI stays below $70,000. Once it reaches $70,000, your interest deductions starts decreasing. You’re not eligible for any deduction if your MAGI is more than $85,000. This also applies to qualifying widows and widowers.
2. If you’re married and filing jointly
You’ll qualify for the full deduction as long as your family’s MAGI stays below $140,000. Once it hits $140,000 the interest deduction starts to decrease. You’re ineligible for any loan interest if you and your spouse earn a combined income of more than $170,000 a year.
3. How To Claim Student Loan Interest Deduction
The claiming process is fairly straightforward. If you paid anything above $600 a year in interest on a qualified student loan, your student loan servicer will send you a Form 1098-E. This form is generally sent to eligible borrowers around the end of January. Reach out to your loan servicer if you think you’re eligible for interest deduction and don’t receive the form by February,
Additional Tax Breaks That Are Worth Exploring
The federal government offers certain educational tax credits that are worth exploring. They could potentially lower your tax bill if you’re currently enrolled in college and paying for qualified education expenses.
American Opportunity Tax Credit (AOTC)
You can claim AOTC if you paid for qualified education expenses for the first 4 years of higher education for an eligible student. With the AOTC, you can get a maximum credit of $2,500 per year per eligible student. There are specific income limitations and other requirements for the AOTC.
Lifetime Learning Credit (LLC)
The LLC provides a credit of up to $2,000 per tax return for qualified education expenses paid for eligible students enrolled in an approved educational institution. You can use the credit to cover undergraduate, graduate, and professional degree courses. This includes programs for learning new job skills.
529 College Savings Plan
This is a type of tax-advantaged savings plan sponsored by states or state agencies and some educational institutions. They act like an investment account with one major difference – they allow your money to grow tax-free. However, you only get this benefit if the funds if you use them for educational costs.
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