As your W2 and other tax forms start rolling in at the beginning of the year, it’s time to gather all of your paperwork to process your tax return. Tax time is a pain for everyone but if you’re eligible, scoring all the deductions you can is ideal.
As a student loan borrower you might wonder about any student loan tax deductions or student loan tax credits. In this post, we’ll cover what you need to know to claim a student loan tax deduction.
Is it possible to claim a student loan tax deduction?
The good news is you can claim a student loan tax deduction. The bad news is, like most good things, there are conditions.
You may be eligible for a student loan tax deduction of up to $2,500. However, you are only eligible if your Modified Adjusted Gross Income (MAGI) doesn’t exceed $80,000. Filing jointly? Your MAGI must be less than $165,000.
How the student loan tax deduction works
If you fit the bill, your private and federal student loan interest could result in a student loan tax deduction.
So when you’re cursing your student loan interest for getting in the way of making any real progress, you can get a little break by deducting some of it. Even then though, the student loan tax deduction may be reduced depending on your income. In other words, you may not be able to deduct the full $2,500.
If your MAGI falls between $65,000 and $80,000 or if you jointly file and your MAGI is between $135,000 and $165,000, the amount you can deduct will be reduced based on a specific formula. In other words, there will be a phaseout — a fancy term for an incremental reduction in how much you can deduct — as your income increases.
In the chart below, you can see a salary of $65,000 or less is not affected by the phaseout. If you’re right in the middle between $65,000 and $80,000, there will be a reduction. Beyond $80,000, any ability to deduct student loan interest is phased out.
Married filing a joint return can enjoy the full benefit if MAGI is no more than $135,000. If it’s between $135,000 and $165,000 there is a reduction in what you can deduct. Beyond $165,000 any tax deductions for student loan interest are phased out.
So if your MAGI is affected by the phaseout, how can you determine what you can deduct? There’s a specific formula that you can follow. Here’s an example from the IRS.
So in short, if your MAGI is more than $80,000 or $165,000 if filing jointly, unfortunately, you don’t qualify for the student loan tax deduction. If it’s within a certain range, you may not be eligible for the full tax deduction.
A word about deductions vs. credits
As noted above, there is a student loan tax deduction for student loan interest. There is no student loan tax credit. The terms ‘deductions’ and ‘credits’ sometimes are used interchangeably but they’re not the same.
Tax deductions are eligible expenses that can lower your taxable income, which can ultimately lower how much you owe. Tax credits provide a dollar-by-dollar reduction on your taxes. So, tax credits are technically better than deductions, but hey, you take what you can get.
How much is the student loan deduction worth?
Based on that little tutorial, you now know that deductions aren’t fully worth the numerical value, they just help lower your taxable income.
So, how much is the student loan tax deduction actually worth then? If you’re in the 25 percent tax bracket, and eligible for the full $2,500 deduction, you can score $625.
While that is definitely helpful,if you’re not eligible for the student loan tax deduction, no need to be upset. It’s not worth a ton of money in the long run.
How to claim the student loan tax deduction
In order to deduct the interest you paid, you’ll need Form 1098-E from your loan servicer. If you don’t have it, follow-up with your loan servicer to get the exact numbers. You’ll only get this form if you paid more than $600 (which let’s face it, is pretty easy to do). If you paid less than $600 in interest, contact your loan servicer so they can tell you how much you paid.
As you go through your tax return, you’ll use Form 1098-E to process your student loan tax deduction. If you use an online tax return preparer, this can be pretty easy. Have any questions? Reach out to a tax specialist.
What if you don’t qualify?
You make too much money and don’t qualify for the student loan tax deduction. But your student loan interest is out of control. What now? What can you do if you don’t qualify?
While it’s not a student loan tax deduction or student loan tax credit, here are two ways to reduce the amount you pay in interest.
1. Sign up for autopay. Federal student loan borrowers can get a 0.25 percent interest rate reduction when signing up for autopay.
2. Refinance. Through the process of student loan refinancing, you may be able to get an even better interest rate than you currently have. In some cases, you can save thousands of dollars.
Consider if refinancing is right for you and see if you qualify for any cashback bonuses when you refinance. This could be a good option if you earn a good income, but want to lower your interest payments.
Take action on your student loans and tax return
If you do qualify for a student loan tax deduction, consider putting the money you saved back toward your student loan payments. That way you can get out of debt faster and make the most out of your student loan tax return. If you don’t qualify, don’t fret, and consider autopay or refinancing to save money on student loan interest.
Did you know about these student loan reduction options?