If you’re one of the 48 million Americans who pay off school loans, expect some relief at tax time. Interest you paid on a student loan can be deducted from your income for the year, reducing the amount of money you pay tax on.
This applies to any loan you have taken out to pay for education costs, such as tuition, books, room and board, or necessary transportation. The loan can be for yourself, your child, or another parent – as long as your name is on it and your income is below the IRS limits, you can deduct that interest from your taxes.
“Even if you don’t have a student loan per se, if you took out a loan and only used that account for qualifying education expenses, the interest on that loan will be deductible,” Alicia Jegede, founder of New Gen. Financial, CBS MoneyWatch said.
Better yet, you can claim this benefit even if you benefit from the standard deduction.
How much can you deduct?
Your loan provider will usually send you a form, called a 1098-E, showing the amount of interest you paid for the year. It is best to wait for this form and not try to estimate your interest payments.
The IRS limits the deduction to $ 2,500 per year. At today’s interest rates, that means you need a student loan balance of over $ 50,000 before you hit the limit. The average household with student loans has just over $ 47,000 in debt, according to a NerdWallet poll from last December, so most people should be covered.
There are some restrictions on who can take advantage of this deduction, noted Sahang-Hee Hahn, a tax lawyer at a large financial services firm. Your filing status cannot be “Married Filing Separately”, nor can you be considered a dependent on someone else’s tax return.
There is also an income limit. If your modified adjusted gross income (MAGI) was greater than $ 70,000 as a single filer or $ 140,000 as a married couple, you can only claim a partial deduction. The IRS offers a formula to calculate the amount you are allowed to claim. Once you earn more than $ 85,000 as a single filer or $ 170,000 as a married person, you are not eligible for the deduction.
How much are you saving?
A deduction reduces the portion of your taxable income, so its value depends on which tax bracket you are in.
For example, a single woman who earned $ 60,000 last year and took advantage of the standard deduction would have a maximum tax rate of 22%. (Using her income, she could probably also file her taxes for free.) If she deducted $ 2,000 in interest on a student loan, she would save 22% of $ 2,000, reducing her tax payment by $ 440.
Now, getting $ 440 back at tax time may not seem like much when you’re trying to reduce the balance on a $ 40,000 loan. But as long as you have the right to get money – any money – from the government, enjoy it.