Taxes and student loans don’t sound like a good time, but they’re still something you’ll need to deal with this tax season — and you better know what you’re doing.
Are student loan payments tax-deductible? How does gross income factor into the tax rules? We’re here to answer these questions and more.
Are student loan payments tax-deductible?
The answer is no. You can’t deduct your student loan payments from your taxable income.
That doesn’t mean that people don’t try.
A past loophole for making your student loan payments tax-deductible was via a home equity line of credit (HELOC). In the past, some borrowers would set up this type of account to draw from and use the funds to pay off student loans because it was tax deductible.
The Tax Cuts and Job Act, active from 2018-2026, removed this benefit. But this doesn’t apply if the money is used solely on the taxpayer’s home.
What about practice loans?
Founder of Student Loan Planner® Travis Hornsby says it’s not unheard of for people now to take out a practice loan (a type of business loan) and use it to pay off their federal or private student loans.
The business loan interest is tax-deductible, so they can get money back doing this. According to the IRS, however, this isn’t allowed. You can’t deduct what is personal interest from a business loan.
Student loans are a personal expense, and paying them off using a business loan is a private benefit. It doesn’t benefit your business. This issue will come up if you get audited about your business debt.
Hoping you don’t get caught isn’t a valid reason to try and make your student loan payments tax-deductible. It’s shady and puts your financial health at risk. Instead, see if you can qualify to have your student loan interest deducted.
Student loan interest deduction is your tax break option
“Can I deduct student loan interest?” is the right question to be asking. Instead of trying to get your student loan payments mixed in with home or business loan deductions, which is not allowed, see if you can get your student loan interest deducted. The IRS allows for a student loan interest deduction, but the bad news is that not everyone can qualify for the deduction.
According to Federal Student Aid, “You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or your dependent.” As long as you paid the interest, the loan can be for someone else.
“This benefit applies to all loans (not just federal student loans) used to pay for higher education expenses. The maximum deduction is $2,500 a year,” according to Federal Student Aid. Higher education expenses include costs like tuition, fees and living expenses.
A maximum of $2,500 can be claimed as an adjustment to income, according to the IRS. You can claim this deduction if you itemize deductions or use the standard deduction, depending on how you choose to file your taxes. To claim the deduction you need to:
- Have a modified adjusted gross income (MAGI) less than the amount set annually.
- Have paid interest on a qualified student loan during the appropriate tax year.
- Be legally obligated to make interest payments on a qualified student loan.
- Have a filing status that isn’t married filing separately.
- Not be claimed as a dependent on someone else’s return (you or your spouse, if filing jointly).
The major barrier for most taxpayers is the MAGI. In other words, if you make a certain amount of income, you won’t get the deduction.
Modified adjusted gross income rules explained
So, what is “too much money” to qualify for the full student loan interest deduction? The amount you can have deducted is actually gradually reduced. It depends on which income bracket you fall in.
For tax year 2020, your interest deduction is gradually reduced if your MAGI is:
- Between $70,000 and $85,000 filing as single, head of household, or widower
- Between $140,000 and $170,000 if you file a joint return
You can’t claim the deduction at all if your MAGI is above $85,000 filing as single or $170,000 or more filing a joint return.
If you’re not sure whether you can qualify for the student loan interest deduction, then you can use the IRS tax tool. It offers an Interactive Tax Assistant that can help you answer find out if you can deduct your student loan interest.
Key things to remember when filing your taxes
When you go to file your taxes this year, here are some things to keep in mind for your financial health:
- Make sure you pay your student loan payment on time and don’t default. Your tax refund can be offset if you don’t pay on time.
- Use our Student Loan Interest Calculator to see how much you’re paying in interest. You can match this to your Form 1098-E, Student Loan Interest Statement. You’ll also be able to see how much of your monthly payment is actually going toward principal.
- Keep an eye out for a 1098-E from your lender or student loan servicer, which will outline your student loan interest paid. You’ll need this to file if you qualify for the deduction.
- Review the most recent 1040 tax return form.
Lastly, look at our strategies for taxes if you’re married. You just might save some money by switching your student loan payment plan.
Will student loan payments ever be deductible in the future?
Tax regulations change every year, so it’s possible that you may be able to deduct your student loan payments one day.
Hornsby suggests that corporations may offer student loan payment assistance structured as a 401(k)-style benefit. It’s refreshing to know that people are trying to make changes because the student loan debt burden is astronomical for millions of Americans.
Until then, we advise you not to try and find a hidden loophole.
Ready to file your taxes?
If you need help with your taxes, we are the go-to source for student loan repayment plans that integrate your taxes. If you’re looking for a tax preparation service to work with, we recommend the Student Loan Tax Experts. Just visit the Student Loan Tax Experts website and mention Student Loan Planner® as your referral source for a free 30-minute consult and a discount on tax prep services.