An education loan not only helps a student to finance their studies, but it can also save them a lot of taxes as well. To make things easy for you, the interest which you pay during the year on a qualified student loan is a student loan interest. This benefit applies to loans of all kinds (not just federal student loans), which are used to pay for higher education expenses. The total claim amount on a student loan interest is a deduction of $2500. Here you can learn more about student interest loan deduction.
If your MAGI or Modified Adjusted Gross Income is less than $70,000 for a single taxpayer or $140,000 if filing jointly, then you are liable to deduct the entire amount of $2500. But if your MAGI is somewhere between $70,000 to $85,000 for a single taxpayer or $170,000, if filing jointly, in that case, you can deduct less than $2500. But if your MAGI is above the maximum amount, then you can’t claim any kind of tax deduction. Any principal that you pay on your student loan is not tax-deductible at all.
Who can claim a student loan interest deduction?
The IRS has introduced various kinds of tax deductions that allow individuals to reduce their taxable income for a taxable year. Student loan interest deduction is one such deduction, which allows a deduction of up to $2500 of the interest paid on a student loan during a taxable year. So, individuals who are liable and fall within the 22% tax bracket can claim a $2500 deduction, thus reducing their federal income tax for the year by almost $550. Mentioned below are the criteria that must be fulfilled by the taxpayer in order to claim the deduction-
- The student loan must have been taken by the taxpayer itself or for the taxpayer’s spouse or any dependents. If you pay on your child’s student loan but aren’t obligated to pay the interest, then you are not liable for the deduction.
- Only during an academic period for which the student is enrolled, the loan must be used and taken at that time only.
- The school where the student is enrolled should be an eligible institution that must be under the supervision of the U.S Department of Education.
- It must be noted that when filing for a deduction, if your status stands as married, but filing separately, then you are not liable to claim the student loan interest deduction. In order to claim the deduction, you both have to file taxes jointly.
Also, it must be noted that a qualified student loan is a loan that you took out solely to pay qualified higher-education expenses that you-
- Took for yourself, your spouse, or any person, who was your dependent at the time when you took out the loan,
- Took a loan during an academic period, just for education purposes.
- Paid the interest within a limited time period, before or after you took out the loan. The time proceeds are mostly disbursed between before (the academic period starts) or after 90 days after it ends.
Does student loan interest deduction affect tax returns?
If you are still in school and receiving money from student loans, this is not considered a taxable income since you are obligated to pay it back. If you have graduated and are making payments on student loans, you may be able to detect some of the student loan interest you have paid. Whether or not you want to take a student loan, but student loan interest deduction will always depend on your income and tax-filing status.
When you meet all the criteria, you are liable for the deduction which $2500. But if you paid more than this amount, you cannot deduct the additional interest paid. Also, the student loan interest deduction directly reduces your adjusted gross income. When you repay student loans, you can claim deductions on interest, but the entire student loan payment amount is not tax-deductible.
Special considerations:
As noted above, you can deduct up to $2500 of the interest you paid on an eligible student loan. But in case you have paid less, your student loan servicer will send you a Form 1098-E, giving you the total amount of interest, you have paid or have to pay. Also, you can download the form from the official website of the IRS. You can easily and effortlessly claim your student loan interest deduction and enjoy a tax break in exchange for all of that interest you have to pay.
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Wrapping up:
In today’s competitive world, good quality education is very necessary in order to lead a good life in the future. But, as nothing is free, so is the case with education too! Nowadays, everything is expensive, and in order to get good quality education, you definitely need a good amount of money. But with an education loan, you can now easily fulfill your dreams of getting a better education. Not only do education loans help with your education, but it also helps to get deductions during tax filling.
They are one of the most trusted tax advisor firms in the U.S., offering you services that will help you to sort your tax problems. So, next time, don’t forget about student loans at the time of paying your taxes. Students loan can impact your federal income tax returns, in several ways, from reducing your taxable income to losing your refund, all depending on the situation. The total amount of student loan interest deduction always gets subtracted from your taxable income, thus helping you to save money. For more information on student loan interest deductions, feel free to visit the website.
