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The student loan interest deduction is a federal tax deduction that allows you to deduct up to $ 2,500 from the interest on student loans you paid during the year. This reduces your taxable income, which can reduce the amount you owe in taxes or increase your tax refund. Your payments and your income bracket determine how much you can deduct from your taxes. If you fall into the 24% tax bracket, for example, you could receive up to $ 600 back through your deduction.
How the interest deduction on student loans works
Your student loan payments are made up of your principal payment, or what you borrowed and repay, plus interest, which is the fee you pay your lender. The interest deduction on student loans allows you to claim these interest payments when you file your taxes.
If you paid more than $ 600 in interest this year, you will receive a Form 1098-E from your loan officer that details the amount you paid. If you paid less, you can still deduct the interest, but you may need to request documents from your loan manager. Some lenders have the information on which you make your student loan payments online, but may not send you the details of what you paid directly.
Phasing out of the tax deduction for interest
The higher your income, the more gradually your interest claim decreases. You cannot claim the deduction if your annual modified adjusted gross income (MAGI) is $ 85,000 or more (or $ 170,000 if you are filing a joint return). If your MAGI (adjusted gross household income plus tax-exempt interest income) is between $ 70,000 and $ 85,000 (or between $ 140,000 and $ 170,000 for joint returns), you can request a reduced amount.
Example of interest deduction on student loans
If you file your own taxes using a Form 1040 and have paid 0 on your qualifying student loans this year, you can claim it all if your MAGI is less than $ 70,000.
If your MAGI is greater than $ 70,000 (or $ 140,000 if you are filing jointly), you will still be able to claim the student loan interest deduction, but not the full amount. You can calculate your reduced amount by how much you paid and your MAGI. For example, if you paid $ 900 in student loan interest this year and your MAGI is $ 73,000, you could be claiming $ 720 on your taxes. Here is the formula:
Interest paid x (MAGI – MAGI CAP / $ 15,000 or $ 30,000 if you deposit jointly) = Amount of reduction
Using the example above, here’s how the formula works:
$ 900 x ($ 73,000 – $ 70,000 / $ 15,000) = $ 180
By reducing the deduction you can claim by $ 180, you can deduct $ 720 on your taxes. Remember that your total tax savings are based on your tax bracket. To calculate the interest deduction on your student loan, you can use a spreadsheet provided by the IRS.
Who is entitled to the deduction?
Not everyone is entitled to the interest deduction on student loans. If you win too much, you may not be able to claim it. If you, your spouse, or another dependent have student loans, you may not be eligible. To claim the interest deduction on student loans, you must:
- Have made interest payments on a qualifying student loan (for you, your spouse, or another dependent for the tax year for which you
- Do not file as “married deposit separately”
- Have a modified adjusted gross income (MAGI) lower than the fixed amount (adjusted annually). For 2019, $ 85,000 if you are single or head of a family or $ 170,000 if you complete a joint declaration
- Do not be claimed as a dependent in your spouse’s return and do not claim your spouse as a dependent in your return
If you qualify, you can claim the interest deduction on student loans as well as the standard deduction. You don’t have to itemize your deductions to claim the student loan interest deduction.
Other tax breaks for college studies
Not everyone is entitled to the interest deduction on student loans. If you don’t have qualifying loans, don’t have the right reporting status, or your MAGI is too high, you may not be able to reduce your taxable income this way.
But there are other education tax breaks that you could take advantage of.
Lifetime learning credit
You can claim up to $ 2,000 for tuition and related education costs for you, your spouse, or other dependents enrolled in qualifying educational institutions. Lifetime learning credit is available to pay for undergraduate, graduate and vocational courses, and other types of vocational certifications.
There is no limit to the number of years you can claim the credit, but the amount you can claim is based on your MAGI. You cannot claim the credit if you earn $ 68,000 or more ($ 136,000 if you are filing a joint return). Like the interest deduction on student loans, the amount you can claim is phased out based on your MAGI. Once your MAGI reaches $ 58,000 (or $ 116,000 if you are filing jointly), the maximum possible credit will be reduced.
U.S. opportunity tax credit
While Lifetime Learning Credit is available for as long as needed, AOTC is only available for the first four years of graduate study of an eligible student. You can claim up to $ 2,500 per eligible student as long as they have not completed the first four years of study at the start of the tax year and are enrolled at least half-time.
As with other credits, you will need to meet certain MAGI requirements to be eligible. Your MAGI must be $ 80,000 or less (or $ 160,000 if you are filing a joint return) to be able to claim the full credit. If your MAGI is between $ 80,000 and $ 90,000 (or between $ 160,000 and $ 180,000 in case of joint filing), you can claim a reduced amount. You cannot claim the AOTC if your MAGI is over $ 90,000 (or $ 160,000 for joint filers).
Education accounts like 529 plans are investment accounts that are used only to pay education related expenses. They also offer friendly tax relief.
Income from 529 plans increases tax free. Since 529 plans are investment vehicles, they have the potential to make (or lose) money. The longer your 529 plan has existed and received contributions, the more earning potential it has. As long as the money is used to pay for eligible education expenses, like tuition, room and board, books, and other expenses, you won’t have to pay taxes on them. You can also use the funds to pay off up to $ 10,000 in student loans.
Use education credits wisely
If you plan to use certain education tax credits to lower your tax bill (or increase your return), be sure to only claim those for which you are eligible. Not everyone is eligible for the American Opportunity Tax Credit, as it is only available during the first four years of college for qualifying students.
You may want to look at the Lifetime Learning Credit and the Student Loan Interest Deduction. Depending on your MAGI and payments, you may be eligible for more than one education tax credit or relief. Remember, if you contribute to a 529 plan, its income is not taxed.
Make sure you ask for the right benefit. If you are audited, you will be required to submit documentation to qualify for specific credits and deductions. If you are not eligible, you could face a tax penalty and the IRS may invalidate your deduction.