March 2, 2020 By College Ave Student Loans
Can I Deduct Student Loan Interest from My Taxes?
If you just started paying back student loans, you may have some questions about deducting interest when tax season rolls around.
For instance, you may be wondering if it’s even possible to deduct the interest you paid on your student loans and, if so, how much you’re allowed to deduct. With the student loan interest tax deduction, you can deduct the interest you paid during the year on a qualified student loan. As of 2019, you can deduct $2,500 or the actual amount of interest you paid during the year, whichever is less.
However, not everyone will qualify for the deduction. Before filing your tax return and deducting student loan interest from your taxable income, make sure you ask yourself the following questions.
Did I pay any interest on student loans this year?
If you didn’t make any payments toward your student loan debt this past year, you aren’t eligible for the deduction.
What type of education loans do I have?
You can claim the deduction if you paid interest on qualified education loans. Qualified student loans are loans you took out solely to pay for higher education expenses that were for you, your spouse, or your dependent for educational needs. The student had to be enrolled at least half-time in a program leading to a degree or certificate when the loan was issued.
The loan must have been used for qualified educational expenses, including tuition, room and board, books and supplies, and transportation.
Student loans from the federal government, banks, credit unions, online lenders are eligible. However, loans from a related person or qualified employer plan are not.
Am I legally obligated to make payments on student loans?
To qualify for the student loan interest tax deduction, you must be legally obligated to repay the loan. That means your name must be on the loan’s promissory note. If you’re a parent, relative, or friend who helped a graduate with payments— but aren’t a cosigner on the loan — you can’t claim the tax deduction.
What’s my tax filing status?
Your filing status affects your eligibility for the student loan interest tax deduction. Your filing status can’t be married filing separately. And you — and your spouse, if filing jointly — can’t be claimed as dependents on someone else’s return. If your parents still claim you as a dependent, you’re ineligible for the student loan interest tax deduction.
How much money do I make?
There is an income cap on who can claim the student loan interest tax deduction. For 2019 tax returns, the amount of the student loan interest tax deduction is gradually reduced if your modified adjusted gross income (MAGI) is between $70,000 and $85,000 ($140,000 and $170,000 if you a joint return). For example, a person who is single and earned $75,000 a year would qualify for a reduced version of the student loan interest tax deduction. Even if they paid $2,500 in student loan interest payments throughout the year, they would only be able to deduct $1,667 on their taxes.
To figure out what your deduction would be, you can use the student loan interest deduction worksheet provided by the IRS.
If your MAGI is over $85,000 (or $170,000 if you file a joint return), you aren’t eligible for the student loan interest tax deduction.
What qualifies as “interest” for the deduction?
If you meet all requirements for student loan interest tax deduction, you may be able to deduct more than just the interest you’re paying each month on your standard student loan payments. For example, you might be able to deduct capitalized interest, which is unpaid interest that the lender added to the loan principal after deferment or forbearance but only if payments were made that year.
You might also be eligible to deduct any loan origination fees — a one-time fee that may have been charged when you initially took out your loan — and interest on credit cards and other types of loans, assuming the money was used to pay for education-related expenses.
Additionally, if you made voluntary payments when they weren’t required (for example, during a deferment or before the loan’s repayment period kicked in), you may also be eligible to deduct that interest on your taxes.
For the less common scenarios, asking a tax professional about your specific situation is often the best way to go. It’s important to know the possibilities so you know what to ask though.
When will I be able to begin making student loan tax deductions?
You’ll usually be able to deduct interest from your student loans for any year you made student loan payments. For example, if you’re currently a college student and you took out loans to pay for education-related expenses, but you haven’t started making payments yet, you won’t be able to deduct the interest on your taxes.
What if I refinanced my student loans; do I still qualify for the deduction?
If you refinanced any of your student loans, you are generally able to deduct the interest if you meet the above requirements. This includes consolidated student loans and collapsed student loans. However, do note that if you refinanced an eligible student loan for more than the initial amount and that additional money was not used for any qualified education expenses, you won’t be able to deduct the interest.
I made student loan payments on my child’s behalf; can I claim the deduction?
Whether or not you can claim the deduction is dependent on the type of student loans.
If you took out Parent PLUS Loans, parent private student loans, or co-signed student loans with your child and are legally responsible for their repayment, you can deduct the interest you paid on the debt.
But if you just made payments to give your child some relief — and are not legally obligated to make payments — you cannot claim the deduction.
What if I made extra payments on my student loans?
Making extra payments on your student loans, meaning you paid more than the minimum monthly payments, is a great way to save money on interest charges and pay off your student loan debt faster. Luckily, the extra interest you paid on your student loans is deductible too; it’s not limited to only the minimum required payments.
When calculating how much interest you paid, make sure you include all interest payments for the year.
What if my wages are being garnished to repay my loans?
If you are in student loan default, your wages may be garnished, or the government can seize your tax refund to repay your student loans. However, you’re still eligible for the student loan interest tax deduction, even if payments were forcibly made with wage or tax refund garnishment.
How do I claim the deduction?
You can claim the student loan tax interest deduction when you file your tax return.
If you paid $600 or more in interest on any of your student loans, your student loan servicer will send you Form 1098 E-Student Loan Interest Statement. You’ll either receive the form in the mail, or you can download it online from your student loan account. This form will list exactly how much you paid in interest over the past year on that loan.
If you didn’t pay enough to get a Form 1098-E, you can still claim the deduction. You’ll just have to look up your loan account information and manually calculate how much interest you paid.
To claim the deduction, enter the full amount of interest you paid on line 33 on Form 1040 or Form 1040NR. If you’re filing a Form 1040A, it will be on line 18. Lastly, if you’re filing a Form 1040NR-EZ, it will be line 9.
Deducting items on your taxes can be a little confusing, especially if you’re filing taxes for the first time or if your financial situation has changed since the last time you filed. It can be good to have a professional, such as an accountant, help you out if you’re not sure the best way to proceed. Moving forward, you’ll know the most efficient way to deduct your student loan interest when you file your taxes.
If you’re still not sure if you’re eligible for the student loan interest tax deduction — or how much you can deduct on your taxes — use the IRS tax assistant calculator for help.
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