Can You Claim Student Loan Interest On Taxes – Do you have student loans? The IRS may give you a tax break. Find out if you qualify for the student loan interest deduction and learn about other tax benefits for students.

Tax season brings mixed feelings. You may receive a refund, but you may also be subject to an IRS tax bill. Not very fun – especially when a large portion of your budget goes to paying off student loans.

Can You Claim Student Loan Interest On Taxes

Can You Claim Student Loan Interest On Taxes

That’s right: you can write off your student loan interest on your taxes every year.

What You Need To Know To Claim Your Student Loan Forgiveness

In this article, we’ll explain the student loan deduction and help you see if you qualify for it. We’ll then discuss other student tax breaks worth looking into and offer some non-tax tips to help reduce debt and student loan repayments during and after college.

According to the Education Data Initiative, the average student loan repayment period is 20 years, and during that time, borrowers accrue an average of $26,000 in total interest.

The IRS realizes that $26,000 is a lot of money, and they also realize that you are borrowing to gain skills and education that will benefit you and the economy. That’s why they created the student loan interest deduction, a tax break that allows you to deduct the interest you paid on your student loans.

The student loan interest deduction allows you to deduct up to $2,500 in interest paid each year on qualifying student loans. If you paid less than $2,500, you can only deduct up to the amount you paid.

Understanding The 1098 E Student Loan Interest Statement Vs 1098 T Tuition Statement

On the other hand, if you only paid $1,000 in qualifying interest, you can only deduct $1,000 from your income.

Student loan interest is considered an adjustment to your income, also known as an “above the line” deduction. This means you don’t have to itemize your deductions to claim them, like you do with many other types of tax deductions.

Plus, it’s a deduction, not a credit. This means it reduces your taxable income. It does not directly reduce taxes on a dollar-for-dollar basis like a tax credit would.

Can You Claim Student Loan Interest On Taxes

For example, let’s say you earned $50,000 this year and paid $2,500 in qualifying student loan interest. You don’t reduce your taxes owed by $2,500. Instead, you reduce your income – $50,000 – by $2,500 to get $47,500.

How Do Student Loans Affect Your Tax Refund?

Both federal and private loans are good for this deduction as long as you meet the requirements above.

Additionally, this deduction has income limits if you earn a lot, and these limits may change every year due to inflation. The IRS checks your modified adjusted gross income, or MAGI, to see if you’re earning too much.

The IRS has a spreadsheet in its Publication 970 that will walk you through MAGI calculations. Many tax programs also do the calculations for you.

If you qualify and paid more than $600 in student loan interest during the tax year, your loan servicer will provide you with a tax form called 1098-E.

Save Time And Money On Additional Income And Adjustments To Income And Moneyworks Paperwork

This number can be found on Schedule 1, line 21, where it says Student Loan Interest Deduction. It is then used with all the other items on this worksheet to find out the total income adjustments included on your Form 1040 tax return.

Now, if you paid less than $600, you may still qualify – you’ll need to contact your loan servicer to find out how much interest you paid.

If you have multiple lenders, you will receive a 1098-E from each to whom you paid at least $600 in loan interest.

Can You Claim Student Loan Interest On Taxes

The student loan interest deduction can be a lifesaver as you begin your post-graduation life, but it’s not the only tax break the IRS offers to graduates.

How To Get The Student Loan Interest Deduction

Deductions, credits, and savings accounts are available before, during, and after graduation to reduce your tax bill and help offset the costs of college. Here are some of them worth taking a look at:

The American Opportunity Tax Credit allows you or your parents to claim tax credits of up to $2,500 for eligible education expenses, such as tuition and fees.

Because it’s a credit, it directly reduces your taxes on a dollar-for-dollar basis. It doesn’t just reduce your income like it would with a deduction.

You cannot be dependent on the return of someone else, such as your parents. If your parents make a claim on you, they may be able to take out a loan instead.

Claiming The Student Loan Interest Deduction

Additionally, you cannot apply for this credit using the same education expenses that you used to apply for another credit, such as the Lifelong Learning Credit.

Your school will send you a Form 1098-T with information about the tuition you paid. You can use this form to calculate your AOTC.

The Lifelong Learning Credit allows you to claim tax credits of up to $2,000 per year. Unlike AOTC, LLC does not limit the number of years you can apply for a loan. This means you can potentially use it in graduate school after you complete your undergraduate career.

Can You Claim Student Loan Interest On Taxes

The requirements are similar to AOTC, although the income limits are lower. Once again, your parents can claim this instead of you if you are listed as a dependent.

The Line Between The Child Tax Credit And The Pause On Student Loan Payments

College savings plans are tax-advantaged accounts where you and your parents can save money for college. You can invest your money in the market and if it goes up, you won’t be taxed on it.

Each state has its own 529 plan, so you’ll need to check with your state to find out the rules.

That said, these plans don’t allow you to choose your investments – they all go into a fund run by your state – but contributions can be deducted from the contributor’s state tax return.

However, some states have no state income tax or do not allow you or your parents to deduct 529 contributions. In this case, a Coverdell account may work better.

The Federal Student Loan Interest Deduction

They don’t allow you to deduct contributions, which is fine if you live in a state without income tax or deductible 529 contributions. But with Coverdell accounts, you can choose what you invest in.

Whichever account you choose, you can withdraw money tax-free in either case as long as you use it for qualified education expenses. This typically includes tuition and fees, room and board, and books and supplies.

The child is considered the owner of the account, but only the guardian can make any transactions in the account or select investments. Additionally, family and friends can contribute money to the account to help your child save.

Can You Claim Student Loan Interest On Taxes

Once the child turns 18, the account passes to them. They can now legally manage their investments.

Tax Season 2017: Are You Capitalizing On Education Tax Credits And Deductions?

The great thing about these accounts is that a portion of the income or gain is taxed at the child’s rate, which is usually much lower than the parent or guardian’s rate. This can help your family save a few bucks on taxes and prepare your child for college without going into debt.

Tax breaks aren’t the only way to save money on interest and get out of student loan debt faster. Try the programs and tips below to catch more breaks on your student loan payments.

If you’re still in school, prioritize debt-free financial aid first because you don’t have to repay this type of aid.

Grants are a good start. They are need-based, meaning they are awarded based on the winner’s ability to pay for school.

Indiana Will Tax Student Loan Forgiveness

Then look at scholarships. They are usually merit-based and help fill the gap if grants don’t provide you with all the help you need.

Many scholarships can be found online and through your school’s financial aid office. Some require essays, while others only ask you to fill out a short form.

Loan forgiveness programs wipe your loans completely if you have qualifying federal loans and have repaid your loans on time for a certain number of years and meet other requirements.

Can You Claim Student Loan Interest On Taxes

The Public Service Loan Forgiveness program is one of the well-known ones. It will make loans available to many government employees, nonprofit workers, public safety professionals and teachers if they meet certain requirements.

How To Stop Student Loans From Taking Your Taxes

If your monthly federal loan payments are high relative to your income, income-driven repayment plans may be helpful. There are 4 types:

They adjust your payment to your income and family size, so you can continue to make required payments on time.

Each type of income-driven plan also offers loan forgiveness after on-time repayments for 20-25 years, depending on the plan and what you used the loans for.

Refinancing involves paying off an existing loan with a new loan with a lower interest rate, lowering your monthly payment. This can be a great option if you have private loans because these loans are not forgivable.

How To Claim The Student Loan Interest Deduction

For example, if you had $20,000 left in student loans at a 5% interest rate, refinancing might involve getting a $20,000 loan at a 3.5% interest rate to pay off the old loan. You’re still $20,000 in debt, but the interest rate is less than 3.5%.

Sure, you pay less in interest, which lowers your potential tax deduction. However, you will save much more money in the long run.

That said, not everyone has a good enough credit score to refinance right away. Continue to pay off your loan on time to slowly raise your score, then refinance in the future when your score is good enough.

Can You Claim Student Loan Interest On Taxes

Pay off some of your school loans if you can. Reducing your principal balance early means you pay less interest.

Can The Student Loan Interest Deduction Help You?

This applies especially to subsidies

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