Americans are certainly no strangers to student loans. Collectively, we owe about $ 1.4 trillion, and given the ever-increasing cost of the university, that number will only increase. In fact, the average Class of 2016 graduate took on $ 37,172 in debt, up 6% from the previous year alone.
The problem with student loans is that they are some of the most difficult types of debt to eradicate – even filing for bankruptcy won’t eliminate them. Fortunately, the IRS offers those with student debt a reasonable tax break in the form of the interest deduction on student loans. This deduction could be worth up to $ 2,500 if you qualify, but there are eligibility rules that you will need to follow.
How the interest deduction on student loans works
At a maximum, you can deduct $ 2,500 in interest on student loans as long as the loans were taken out to pay for eligible graduate expenses. These include tuition, fees, books, equipment, and room and board. To claim the deduction, your tax return status cannot be a separate marriage declaration, and you cannot be listed as a dependent on someone else’s tax return. To be eligible for a deduction, the loan must be a loan that you purchased to cover your own higher education costs, those of your spouse or a dependent.
As is the case with the majority of tax breaks, there are income limits that dictate whether you will be allowed to claim the interest deduction on student loans. If you are a single filer with a modified adjusted gross income (MAGI) of $ 65,000 or less, you will be able to take advantage of the full deduction. If you earn more than $ 65,000 but less than $ 80,000, you will be entitled to a partial deduction. And if your MAGI is $ 80,000 or more, you won’t get it at all.
Married couples who file jointly are subject to the same restrictions based on income, but with higher thresholds. If you are a joint filer with a MAGI of $ 130,000 or less, you can take advantage of the full deduction. Couples earning more than $ 130,000 but less than $ 160,000 receive a partial deduction, and those earning $ 160,000 or more are disqualified.
How will the deduction benefit you?
Tax deductions in general work by excluding a portion of your income from taxes, so your savings are based on your effective tax rate. Suppose your effective tax rate is 25% and you are entitled to deduct all of the $ 2,500 interest on student loans. In this case, you would save $ 625 on your tax bill. The higher your effective tax rate, the more worth each individual deduction becomes, so it helps to see if you qualify for the interest deduction on your loans.
One more thing to note is that you don’t need to itemize the deductions on your tax return to write off your student loan interest. Because this particular deduction is taken above the line, it is considered an income adjustment and does not require detail.
If you’ve paid off student loans, it’s worth checking to see if you qualify for an interest deduction. Although you can write off any amount of interest up to the $ 2,500 limit, your lender is required to send you Form 1098-E if you pay $ 600 or more in interest during a given year, which will make it even easier to calculate your deduction. . If you don’t have this form handy, you can always contact your lender or view your previous student loan statements for a breakdown. While either step might involve a bit of legwork, it will be worth it if it puts some money back in your pockets during tax season.