Did you borrow money for school? If so, you might be able to save money on your taxes. This is called a student loan interest deduction.
When you pay back your student loans, you pay extra with interest. The government lets you pay less in taxes if you paid this interest during the tax year. The student loan interest deduction is a way to help individuals who paid for school to make higher education more affordable for more people.
If you earn money through a job, gig, or anything else, you’ll owe taxes. Luckily, there are many ways for students to save on their taxes. But what exactly is the student loan interest deduction, and how does it work? In this article, we’ll discuss what student loan interest is, how to save on your taxes, and what you need to do to get this tax break.
- What is student loan interest?
- Is student loan interest tax deductible?
- Requirements for the student loan interest tax deduction
- How to claim the student loan interest deduction on your tax return
- Other types of tax deductions for students
- Navigating the student loan interest deduction
What is student loan interest?
Like other loans, such as personal, car, and mortgage, student loans have interest rates. These are fees that lenders charge to make money on the loan. As with most other loans, you pay off two things each time you make a loan payment — the loan’s principal (the actual amount of money you borrowed) and the loan’s interest.
Lenders charge different interest rates for student loans, and sometimes the rates change during the length of the loan.
The amount of interest is usually shown as a yearly rate. This is called the APR, which means annual percentage rate. It tells you how much extra you’ll pay each year for borrowing the money.
Is student loan interest tax deductible?
Yes, federal student loan interest is tax-deductible on your federal tax return. When you do your taxes, you can deduct or subtract some of the interest you paid on your student loans from your taxable income. This makes it look like you earned less money, so you might pay less taxes.
Anyone can claim the student loan interest deduction — even if they don’t itemize their deductions on their tax returns. That means it’s easy for most people to use, depending on their income and how much interest they’ve paid.
This tax break works for federal student loans and some private student loans, too.
Remember, the student loan interest deduction is only for the interest part of your loan payments, not the whole amount. Additionally, student loan forgiveness is taxed differently and may be taxed as regular income or not at all.
That said, deducting student loan interest from your taxes is still a great way to save some money when you’re paying for your education.
However, remember that while student loan interest is tax-deductible on your federal tax return, different states have different rules. Talk to a tax expert to learn whether you can deduct student loan interest from your state taxes.
Requirements for the student loan interest tax deduction
You may already know how personal loans affect taxes, but your student loans can also influence how much you pay in taxes every year. You can deduct up to $2,500 each tax year as long as you meet the requirements for a student loan interest tax deduction. Requirements include:
- Your tax filing status is anything except “married filing separately.”
- No one is claiming you as a dependent.
- You are legally obligated to pay interest on a qualified federal student loan.
- You paid interest on a qualified federal student loan.
If you want to deduct student loan interest and you file your tax return as “married filing jointly”:
- You can deduct all $2,500 if your modified adjusted gross income (AGI) is $155,000 or less.
- If your modified AGI is more than $155,000 but less than $185,000, your student loan deduction is gradually reduced, meaning the more money you make, the less student loan interest you can deduct.
- If your modified AGI is $185,000 or more, you can’t claim a deduction on your student loan interest.
If you want to deduct student loan interest and you file your tax return as “single,” “head of household,” or “qualifying widow(er)”:
- You can deduct all $2,500 if your modified adjusted gross income (AGI) is $75,000 or less.
- If your modified AGI is more than $75,000 but less than $90,000, your student loan deduction is gradually reduced, meaning the more money you make, the less student loan interest you can deduct.
- If your modified AGI is $90,000 or more, you can’t claim a deduction on your student loan interest.
How to claim the student loan interest deduction on your tax return
Here’s how you can claim your student loan interest deduction when you do your taxes:
- Look for form 1098-E: If you’re wondering, “What do I need to file taxes and take advantage of the student loan interest deduction,” there is a special form you should look for in the mail. If you paid at least $600 or more in student loan interest, you’ll get this form in the mail, or you can find it on your loan servicer’s website in some cases.
- Find out how much interest you paid: Look at the 1098-E form or ask your loan company how much interest you paid. If your job helps pay your loans, don’t count the money they paid. Only count what you paid yourself.
- Fill out your tax form: On the main tax form (Form 1040), look for “Schedule 1”. Write how much interest you paid on line 21 of this form. If you’re using an online tax service, you’ll essentially go through the steps until you reach this point. Meanwhile, if you’re working with a CPA or tax advisor, share your 1098-E with them, and they’ll take care of the rest.
Other types of tax deductions for students
Apart from deducting student loans from taxes, there are other tax deductions for students to help you save. Let’s look at some other ways you might be able to save money on your taxes with credits and deductions:
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible school. This credit can help pay for undergraduate, graduate, and professional degree courses. This includes courses to get or improve job skills. There is no limit on the number of years you can claim the credit, and it is worth up to $2,000 per tax return.
To claim the LLC, you must meet all three of these qualifications:
- You, your dependent, or a third party pay qualified education expenses for higher education.
- You, your dependent, or a third party pay the education expenses for an eligible student enrolled at an eligible institution.
- The eligible student is yourself, your spouse, or a dependent you listed on your tax return.
College savings plans
College savings plans are special bank accounts that allow you to save money for school. It’s similar to a savings account, but it’s just for paying for college or other types of school after high school. You or your family will put money into this account, and the money invested will grow over time.
When it’s time for college, you can use this money to pay for classes, books, rent, and other school supplies you might need.
But here’s the best part — college savings plans can also help you save money on taxes. The money in the account grows tax-free, which means it can grow faster. When you take money out to pay for school, you won’t pay taxes because the account is funded with after-tax dollars.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum credit you can get each year per eligible student is $2,500.
Requirements for the AOTC include:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half-time for at least one academic period beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
Taxpayers receive 100% of the credit for the $2,000 spent on eligible education, then 25% of the credit for the following $2,000 spent.
Self-employed deductions for education
If you work for yourself after college instead of getting a traditional W-2 job, you’re self-employed. If you’re self-employed, there are other ways you can save on taxes.
If you take classes or go to workshops to get better at your job, you might be able to pay less in taxes by deducting these expenses. The money you spend on these classes can be taken off your income when you do your taxes. This means you’ll pay less in taxes overall.
You can use this deduction to pay for different training opportunities, including:
- Classes that help you perform better at your job
- Attending relevant workshops or seminars
- Books or online courses that teach you new job skills
To claim this deduction, the classes or learning must be related to your current work. You can’t use this deduction for classes that would help you start a new type of career. Additionally, you’ll need to keep detailed records and receipts of what you spend on your learning.
Navigating the student loan interest deduction
Now that you’ve learned about the many ways you can save on taxes when you’re in school or repaying your loans, it’s time to start thinking about taxes. You can save by deducting student loan interest, using special credits, and opening college savings plans. All these things can help keep more money in your pocket.
Taxes can be tricky, especially when it comes to deductions and credits. We can help. With more than 20 years of tax prep experience, our experts focus on accuracy, finding deductions, and ensuring you get the biggest refund possible. We offer expert assistance for all your income tax needs. Stop by today or give us a call at (800) SUN-LOAN.
