Every year around this time, mailboxes across America are filled with tax forms. Sometimes these tax forms go directly to a tax professional without opening them. Other times, taxpayers may conscientiously open these forms and enter the information, box by box, into tax preparation software. In either case, it is not unusual for taxpayers not to understand the meaning of all the numbers, letters and other information on these forms. It’s about to change.
This week, I’m going to dissect some of the most basic tax forms for you. The more you know, the less scary some of these shapes can be.
, here’s what you need to know about Form 1098-E, Student loan interest statement:
A 1098-E form, Student loan interest statement, is used to report interest of $ 600 or more paid to a lender on a student loan.
Your credentials and lender credentials are reported on the left side of the form. Your social security number may also appear on the form – or only on the last digits. The first digits of the number may be redacted for your privacy.
Financial information is listed on the right side of the form and it is very brief. In short, crazy. It’s just a number. In box 1, your lender reports the interest you have earned during the year. It is not the total of your payments during the year: the capital is not indicated on this form.
If your loan is made on or after September 1, 2004, box 1 may also include loan origination costs and capitalized interest received during the year. If your loan was made before September 1, 2004, you may be able to deduct loan origination fees and capitalized interest not shown in box 1 – you will also see a check in box 2.
The purpose of the form is to help you with your tax preparation: you are allowed to pay interest on a student loan taken out to pay for graduate school fees. The interest deduction on student loans is available even if you do not itemize. This is technically an income adjustment, but it is sometimes referred to as an “over-the-line” deduction since you reduce your taxable income on the first page of your return without taking into account any deductions claimed on a schedule. TO.
You will report the amount of the deduction on line 33 of your Form 1040. This amount is likely much less than what you see on this Form 1098-E. This is mainly for two reasons:
- There is a cap on the amount of interest you can claim each year. You can reduce your taxable income by up to $ 2,500 in eligible student loan interest per year. This amount includes compulsory and voluntary interest payments.
- There are limits and phase-outs based on your income. For 2014, the student loan interest deduction is phased out (reduced) if your modified adjusted gross income (RMAG) is between $ 60,000 and $ 75,000 ($ 125,000 and $ 155,000 if you are filing a joint return ); you cannot take advantage of the student loan interest deduction at all if your MAGI is $ 75,000 or more ($ 155,000 or more if you are filing a joint return). For 2015, phase-outs apply to taxpayers whose MAGI exceeds $ 65,000 ($ 130,000 for joint returns), and are completely eliminated for taxpayers whose MAGI is $ 80,000 or more ($ 160,000 or more). more for joint declarations).
There are additional limitations. Your student loan must have been taken out only to pay eligible educational expenses, including tuition and fees; books, supplies and equipment; and other necessary expenses such as transportation. Room and board may also be included if the cost does not exceed the room and board allowance included in the cost of attending your school for federal financial aid or the actual amount charged if you live in accommodation owned or operated by your school. .
As with other educational tax breaks, you must reduce your eligible educational expenses by the total amount paid for the educational assistance provided by the employer; tax-free distribution of income from a Coverdell Education Savings Account or Qualifying Education Program (QTP); Interest on US savings bonds previously excluded from income; scholarships, scholarships and tax-free grants; and veteran benefits.
For the purposes of the deduction, the student who borrowed the funds must be you, your spouse or your dependent, and must have been enrolled at least half-time in a diploma program at the time the loan was granted. been contracted. For the purposes of the deduction, an individual may be dependent on you even if you are dependent on another taxpayer; even if the individual files a joint return with a spouse and even if the individual had gross income for the year equal to or greater than the exemption amount for the year.
You cannot deduct interest from your student loan if you separately file a marriage declaration or if someone else is claiming an exemption for you on their tax return.
A few other things: the loan should not come solely from the PHEAA or other institutional student loan organization. You can include other debt, like credit cards and line of credit IF you only use it to pay off student debt: in other words, don’t mix your education expenses with other expenses personal. Bank and other loans are also eligible, but the borrowed funds cannot come from a related person or be made under a qualifying employer plan. Of course, these will not show up on Form 1098-E.
That’s the best part: If someone else makes a student loan payment on your behalf, it is treated, for federal income tax purposes, as if you made the payment. If, for example, your mom and dad repay part of your loans, you can still claim the interest for the purposes of the deduction (but be careful and read the criteria above: if your parent claims you as a dependent but that you are legally obligated to repay the loan, then neither of you will be able to benefit from the deduction).
For details on other tax forms, like 1098-T and 1099, check out the rest of the series this week: