Taxes are an inevitable part of everyone’s financial life, and they are often one of the more confusing topics to understand. The tax code is complex, consisting of many rules and guidelines for what’s taxable, what’s not, and what can be used to help reduce tax liabilities each year. However, it is essential to recognize what strategies you can use to save money on taxes each year.
The student loan interest tax deduction is one method student loan borrowers can bring down their tax bill. Here’s how it works.
The Basics Behind the Student Loan Interest Tax Deduction
For student loan borrowers, the student loan interest tax deduction is an adjustment to your taxable income based on the amount of student loan interest you paid throughout the year. Because it is an adjustment to income, there is no need to itemize other tax deductions to use this strategy. However, there are limits on how much interest you can deduct.
You can deduct paid student loan interest, up to $2,500, during the calendar year. Both required student loan interest payments as part of your monthly repayment agreement and voluntary student loan interest payments can be included in the total amount.
The deduction was designed to help student loan borrowers save money during tax season. Although it is helpful to have an opportunity to reduce taxes owed because of paid student loan interest, there are some eligibility requirements which must be met to use the deduction.
Anyone who has paid interest on qualified student loans and meets income thresholds may qualify for the student loan interest tax deduction. Qualified student loans are defined by the IRS as:
- A loan obtained solely to pay for qualified education expenses
- A loan, either federal or private, that was used to pay for these expenses for yourself, a spouse, or a dependent
- A loan that was obtained to pay qualified expenses that were due within a reasonable amount of time, such as around the time of the start of a semester
In addition to being a qualified student loan, the IRS sets out other criteria which must be met. You must be legally obligated to pay interest on the loan to qualify for the deduction, and your filing status cannot be married filing separately. Any other filing status may use the deduction if other requirements are met. Finally, your modified adjusted gross income (MAGI) has to be under a certain amount.
For the 2019 tax year, your MAGI as a single filer cannot be more than $85,000; married filing joint taxpayers cannot exceed a MAGI of $170,000. However, the deduction begins to phase out at $70,000 for single filers and $140,000 for married taxpayers.
How Do You File the Interest Deduction?
In order to file for the student loan interest tax deduction, you will need to know how much you paid in interest throughout the year. Fortunately, this isn’t a number you need to keep track of on your own. Your student loan lender provides you with a 1098-E during tax time which totals the interest you paid on your loans. If you have multiple student loan lenders, be sure to be on the lookout for a 1098-E from each. You may receive the form by mail, or if you’ve signed up for e-delivery of statements, the form may arrive in your e-mail.
It is important to note that lenders may only populate this tax form if you have paid more than $600 in student loan interest during the year. If you have not met that minimum, you may need to look to your last student loan statement of the year to see if the interest payments are listed. If you do not receive one but paid student loan interest throughout the year, connect with your student loan lender to retrieve a copy of your 1098-E.
Once you have this special tax form, you simply input the totals into your tax return paperwork to calculate your total deduction. Remember, you cannot deduct more than $2,500 in any given year. Even if the total amount of interest paid exceeds this amount, you won’t get a higher deduction.
Filing for Federal Loans vs. Private Student Loans
Fortunately, although they have distinct differences, both private and federal student loans are viewed the same under the law when it comes to deducting student loan interest. If you paid interest on student loans that fall under the criteria mentioned above for qualified loans, you can deduct the interest up to the annual maximum. The only restriction on the student loan interest tax deduction is the modified adjusted gross income limits, and those who file taxes as married but separate. All other student loan borrowers have an opportunity to save with this tax deduction.
Andrew Rombach is a Content Associate for Lendedu – a website that helps consumers and small business owners with their finances. When he’s not working, you can find Andrew hiking, hanging with his cat Colby, or edge guarding in Super Smash Bros.