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 interest from your student loans and, if so, how much you’re allowed to deduct. It can be a little confusing because there is no single answer that applies to everyone. It will vary based on different factors.
When deducting student loan interest and determining eligibility, be sure to ask yourself the following questions.
How do I know if I’m eligible to deduct student loan interest on my taxes?
In order to deduct student loan interest on your taxes, you must first determine your eligibility. You could be deducting the interest from your own student loans, or you may be doing so for a spouse or a dependent if they’re part of your tax return. The debtor (whether it was you or someone else) must have been enrolled at least half-time in an education program that leads to some type of certificate of completion – for example, a degree or other type of credential. The definition of half-time can vary by school, so if you’re unsure what your school designates as full- and half-time schedules, you’ll want to confirm this first to make sure you meet this requirement.
Your income will also affect what you can deduct for student loan interest on your taxes. The amount of your student loan interest deduction is gradually reduced (or phased out) if your MAGI (Modified Adjusted Gross Income) is between $65,000 and $80,000 (or between $130,000 and $160,000 if you’re filing jointly).
If your MAGI is above the maximum amount, you can’t claim a student loan interest deduction. If your MAGI is somewhere in the phaseout range, IRS.gov has a formula for calculating your phaseout, which is to “multiply your interest deduction (before the phaseout, but not more than $2,500) by a fraction. The numerator (top part) is your MAGI minus $65,000 ($130,000 in the case of a joint return). The denominator (bottom part) is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct.”
Does it matter what my student loan paid for?
In order to deduct student loan interest on your taxes, the money must have been used for qualified education-related expenses. This not only includes tuition and fees at an eligible educational institution but also room and board, any required books and materials needed for classes, and other necessary expenses that were needed in order to attend class (e.g., transportation to and from campus).
What qualifies for 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.
Currently, tax filers are eligible to deduct either the entire amount of interest they paid in any given year or $2,500 in interest – whichever amount is less.
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 about refinanced student loans?
If you refinanced any of your student loans, you are generally able to deduct 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.
How do I go about making the deduction?
When it’s time to claim student loan interest as a deduction, you’ll need to do so by making an adjustment to your income on your taxes. If you’re using a Form 1040 or Form 1040NR, this will be on line 33. 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 deducting taxes for a particular item for the first time or if your financial situation has changed dramatically 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. At the very least, having someone explain it to you for the first time can be beneficial so that you understand moving forward the most efficient way to deduct your student loan interest when you file your taxes.