Student Loans Tax Deductible: Benefits, How to Claim, Calculator & Alternatives
If you’re considering taking out a student loan (or currently have one that you’re repaying), you should expect a significant portion of each monthly payment to go toward interest. Student loans can help you access educational opportunities that you would not otherwise be able to afford.
However, after you have your hard-won graduation in hand (or proudly displayed on your wall), those same student debts can become a cause of worry. The government offers a student loans tax deductible as one of the key measures to assist alleviate the rising load of student debt.
The amount of student loan interest you pay during the year is deducted from your taxable income, up to a maximum of $2,500. It’s just for the interest you paid, not for the overall amount of student loan installments you made for your higher education debt.
We’ll go through the student loans tax deductible, repayment plans for student loans, and how your filing status affects your taxes. We also go through several current student tax benefits that you should take advantage of if you qualify.
Here is a break down of what we will be covering today.
What is the Student Loans Tax Deductible?
The student loans tax deductible is a tax advantage that can help you pay for your education by offsetting the expenses of borrowing. If you paid interest on a qualifying student loan throughout the year, you may be eligible for the student loan interest deduction.
You don’t have to itemize deductions if you claim it as an adjustment to your income. It’s one of a number of tax advantages given to students and their parents to assist with the cost of higher education.
To be eligible for student loans tax deductible, individuals must fulfill specific conditions, including as filing status and income level. If you have a $34,000 student loan debt and a 4.8 percent interest rate, you’ll pay around $1,500 in interest every year.
Fortunately, you may be able to deduct up to $2,500 in student loan interest payments from your income and profits at tax time, lowering your adjusted gross income (AGI). Whether you itemize your deductions or use the standard deduction, you may claim the student loan interest deduction.
The student loans tax deductible will be steadily decreased and finally abolished if your modified adjusted gross income (MAGI) surpasses the annual ceiling for your tax filing status, according to the IRS. The standard deduction was substantially doubled as a result of the Tax Cuts and Jobs Act of 2017.
If you’re filing a single return in 2019, the standard deduction is $12,200. If you’re the head of your home, you’ll get $18,350. Married couples filing joint returns pay $24,400. As a result, about nine out of ten taxpayers will benefit from using the standard student loans tax deductible.
The good news is that you may claim the tax savings on student loan interest payments if you use the standard deduction. It’s no surprise that almost 12 million Americans claim nearly $14 billion in student loans tax deductible each year.
Is Student Loan Interest Deductible?
The quick answer is that it is deductible, due to a provision known as the student loan interest deduction. When filing and submitting their yearly federal income tax return to the Internal Revenue Service, borrowers can deduct all or part of the interest they pay on their federal student loans and private student loans (IRS).
Even if you take the standard deduction, you can claim the student loans tax deductible. However, as you might expect, there are some essential guidelines for who is qualified, which types of loans qualify, and how much you may claim.
How to get the Student Loans Tax Deductible
Unlike many other deductions, the student loan interest deduction does not require you to break out your tax return. You can instead claim the student loans tax deductible as a direct reduction in your income.
As a result, even if you use the standard deduction on your tax return, you may still be entitled to claim this depreciation. Note that only interest paid on qualified student loans (up to $2,500 depending on your income and enrollment status) is tax deductible.
The amount you pay in throughout the course of the year for your principal loan has no bearing on the deductibility. Your lender should send you a Form 1098-E for Student Loan Interest Statement if you are paying at least $600 in qualifying student loan interest (IRS).
This form can be used to claim the student loan interest deduction on your tax return.
Are you unsure if you are eligible for the deduction?
To see if you are eligible, the IRS conducts an online interview. Even if you believe you aren’t qualified for the deduction, it’s worth checking. Deducting student loan interest from your tax statement might save you hundreds of dollars, cutting your tax payment or raising your tax refund.
How does the Student Loans Tax Deductible Work?
When submitting your annual taxes with the Internal Revenue Service, you can take advantage of an over-the-line income waiver known as the Student Loan Interest Deduction (IRS). The excess income exclusion, also known as a “income adjustment,” lowers your federal income tax return’s Adjusted Gross Income (AGI).
As a result, your taxable income for the year will be reduced. All you need to do to apply for a student loan interest deduction is to include the whole amount of qualifying student loan interest on the IRS Form 1040.
To claim the student loans tax deductible, you don’t have to break down the loan interest payments, but we’ll get to the particular eligibility conditions and deduction in a minute. You should be able to claim this withholding tax on any interest paid on qualified college loans during the tax year, up to a maximum of $2,500.
The amount of your deduction will be dependent on the entire amount you paid if you paid less than $2,500 in interest on your student loan. For example, if you paid only $1,500 in interest during a tax year, your deduction will be $1,500. Your taxable income will be lowered by $1,500 as a result.
While the student loan interest deduction is a popular tax break that many borrowers may take advantage of, it’s crucial to remember that not all loans are qualified. All federal student loans and the majority of private student loans are eligible for repayment.
The following are some examples of college loans that qualify for the Student Loan Interest Deduction:
- Federal Stafford Loan with Interest Subsidy
- Private federal loan that is not subsidized
- Perkins Loans from the Federal Government
- Loans with financial statements from the federal government PLUS
- PLUS federal parent loan
- Consolidation Loans from the Federal Government
- Loans from the government for education
- Student loan from a private lender
Interest on federal student loans obtained under the federal direct credit program and the federal family education loan (FFEL) program is eligible. It’s also worth noting that the student loan interest deduction applies to both students and parents’ borrowers.
This covers borrowers of federal Parent PLUS loans as well as borrowers of private parent loans. The interest deduction for student loans does not apply to loans from related parties or loans from a pension fund. The debt must be a student loan taken out for yourself, your spouse, or a family member.
Qualified Educational Expenses
Another requirement for the student loans tax deductible is that the loan was solely utilized to cover eligible educational expenditures. The following are some examples of qualifying higher education costs:
- Tuition for college
- Plans for lodging and meals (i.e., room and board)
- Equipment and supplies
- To and from school transportation
Credit card debt and other mixed-use loans are often ineligible for this tax benefit. The only exception to this regulation is if you take out a loan to pay for eligible educational expenses (and absolutely nothing else).
The amount of qualified training expenses that is used to justify additional tax deductions for training costs must be subtracted from the total amount of qualified training costs. Double dipping is prohibited by IRS regulations.
When you use two or more tax deductions and credits to decrease your tax burden, this is known as double-dipping. When you use the same expenditures to claim two distinct education tax advantages, it’s known as student loan double-dipping.
For example, the Student Loan Interest Deduction, the American Opportunity Tax Credit, and a tax-free payout from a 529 plan cannot all be claimed for the same eligible cost. This is not permitted by the IRS. When in doubt, justify any spending with a single tax advantage.
Claiming the Student Loan Interest Deduction
Enter the permitted amount on line 20 of Appendix 1 of your 2019 Form 1040 to claim the student loan deduction. This means you may claim it whether you take the standard deduction or separately itemize your deductions.
A lot of the work is done for you when you utilize tax preparation software like Tax Act. If you need help calculating the amount that can be entered online 20, here’s what you need to know.
Find out how much Interest you paid
Look for the Form 1098-E, Student Loan Interest Statement, from your loan servicers to see how much interest you paid on your student loans throughout the tax year. By Jan. 31, any loan servicer who collected at least $600 in interest from you must submit you a Form 1098-E, either online or by mail.
You can seek a Form 1098-E from each servicer if you paid at least $600 in interest during the tax year but made payments to numerous servicers — even if they collected less than $600 in interest from you.
You can contact each of your servicers for the precise amount of interest paid during the tax year if you paid less than $600 in student loan interest.
Calculate the Reduction in your Taxable Income
Unless your income approaches or exceeds the qualifying restrictions, you can deduct up to $2,500 in student loan interest payments from taxable income. For the 2019 tax year, the interest deduction for student loans will be phased out for taxpayers with MAGIs of between:
- If you are a single parent, head of home, or qualified widow, you can earn between $70,000 and $85,000.
- For married couples filing jointly, the amounts are $140,000 and $170,000.
Remember that your MAGI is your Adjusted Gross Income (AGI) before the student loan interest deduction is applied. There is a method to compute your decreased loan interest deduction if your income falls under the given parameters.
Use the Student Loan Interest Deduction worksheet on Form 1040 or consult IRS Publication 970, “Education Tax Benefits,” Chapter 4 for more information.
How to Calculate Your Student Loans Tax Deductible
The first step in calculating your student loans tax deductible is to determine your Modified Adjusted Gross Income (MAGI). This is your adjusted gross income (AGI), which is calculated before any additional tax deductions, such as the student loan interest deduction you’re expecting to qualify for.
This cannot be deducted before computing your MAGI. It would be the same of claiming a tax deduction twice for the same cost. You must also add back the following exclusions and deductions if you took any of them, but these are somewhat uncommon:
- The deduction for overseas earned income
- Housing exclusion for foreigners
- Deduction for foreign housing
- Residents of American Samoa and Puerto Rico are exempt from the income tax.
Divide your MAGI by $ 15,000 ($ 30,000 if married, sign up jointly) once you’ve calculated it. Convert the answer to a three-decimal-place decimal number. If the number is more than 1,000, multiply it by 1,000. Use it as is if it is less than 1,000.
Now double your student loan interest of up to $ 2,500 by the decimal figure. The answer will be less than $2,500. You don’t have to wade through your whole year’s worth of student loan statements to figure out how much interest you paid.
After the beginning of the year, your lender should issue you a Form 1098-E. In the 2021 version of the form, field 1 shows the amount of interest you paid.
Note that most taxpayers’ MAGIs will be extremely similar, if not identical, to their AGIs. With the student loan interest deduction, you may just need to top up the deduction yourself.
Documents you need to File your Tax Return
To file your tax return and claim your student loans tax deductible, you’ll need the following documents:
- W-2: If you worked and paid income taxes, you’ll need a W-2 from each of your employers to properly file your taxes. W-2s from any taxable scholarship, grant, or tuition aid source are also required.
- Get a 1098-E from any loan servicer to which you sent payments if you want to claim the student loan interest deduction. This will allow you to document all of the interest you paid during the tax year.
- 1098-T: You’ll need a Form 1098-T, Tuition Statement, from your school to claim the American opportunity credit or the lifetime learning credit.
Student Loan Interest Deduction Alternatives
In addition to the interest deduction on student loans, students enrolled in colleges and their parents may be eligible for other advantages, such as tax rebates. Tax credits are more significant than deductions since they are subtracted from your tax liability rather than just decreasing your taxable income.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) allows taxpayers to deduct qualifying expenses incurred during an eligible student’s first four years of post-secondary education. The total credit per student per year is capped at $2,500. On the first $2,000 spent on expenses, taxpayers receive a 100 percent credit, and on the next $2,000 spent on that student, taxpayers receive a 25% credit.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit (LLC) gives students enrolled in an appropriate post-secondary institution a maximum tax credit of $2,000 per tax return on qualifying tuition and school-related expenses. This covers all eligible expenditures for bachelor’s, master’s, and doctoral studies. The credit can be claimed for an unlimited number of years by taxpayers.
College Savings Plans
By enrolling in a 529 plan, you can also save money on taxes. Parents who save for their children’s education can take advantage of tax benefits with this type of savings plan. The Tax Cuts and Jobs Act (TCJA) of 2017 broadened the regulations to allow up to $10,000 in yearly tuition fees for K-12 programs at private, public, and religious institutions.
When the Setting Every Community Up for Retirement Enhancement (SECURE) Act was approved in December 2019, the regulations were broadened even more. This law permits account holders to utilize their plans to pay for fees associated with a beneficiary’s authorized educational program and to withdraw up to $10,000 on eligible student debt for the rest of their lives.
Student Loan Payment Suspensions
During the coronavirus outbreak, President Trump halted payments on federal interest-free student loans indefinitely on March 13, 2020. President Joe Biden extended the moratorium until September 30, 2021, on his first day in office, January 20, 2021.
President Biden extended the federal student loan repayment holiday for another 90 days – until May 1, 2022 – on December 22, 2021, after the US Department of Education extended it until January 31, 2022. It is important to stress, however, that this has no personal impact.
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