How Much Student Loan Interest Can You Deduct on Your Taxes?

0


[ad_1]

Most Americans do not itemize deductions on their tax returns, which means most people cannot take advantage of the mortgage interest deduction, medical expense deduction, local and state tax deduction ( SALT), or even the charitable deduction. contributions.

However, some deductions can be used even if you do not detail. They are known as above the line deductions, and those that can be especially valuable to the millions of Americans with student loan debt allow interest paid on student debt to be deducted. In this article, we’ll take a closer look at the student loan interest deduction and how much it could potentially save you on your taxes.

Image source: Getty Images.

How Much Student Loan Interest Can You Deduct on Your Taxes?

The short answer is, you can deduct $ 2,500 in student loan interest for the 2020 and 2021 tax years. But there’s a little more to the story.

First, the student loan interest you deduct must have been paid in the tax year, not just billed. In other words, if you were billed a total of $ 3,000 in student loan interest for the year but your repayment plan only required you to pay a total of $ 1,000, that’s it. what you are allowed to deduct.

In addition, the limit of $ 2,500 is by tax return, not per person. Thus, married couples can only deduct a total of $ 2,500 in interest on student loans, even though both spouses paid interest on student loans during the year.

Finally, not everyone is entitled to the deduction. We’ll go into more detail in the next section, but there are some income requirements that you must meet as well as the requirements for the student loans themselves.

Are you eligible for the student loan interest deduction?

To claim the interest deduction on student loans, you must meet three types of conditions:

  1. You must have paid the interest on the student loan during the year.
  2. Your income must be below a certain threshold.
  3. Your debt must meet the IRS definition of “student loan debt.”

We’ve already discussed the first requirement, so let’s take a look at the other two.

Student Loan Interest Deduction Income Limits

The Student Loan Interest Deduction is designed to provide tax relief for low- and middle-income Americans who make student loan payments. So high incomes cannot take advantage of it.

If your Modified Adjusted Gross Income (MAGI) exceeds a certain threshold, the opportunity to take advantage of the student loan interest deduction begins to disappear, meaning you are only eligible for a partial deduction of your loan interest. student. This is called “phase-out”. Then if your MAGI goes over an even higher threshold, you can’t use the deduction at all.

For the 2020 and 2021 tax years, here are the limits for the phase-out of the interest deduction on student loans:

2020 tax return status

The deduction starts to disappear with MAGI above …

The deduction is completely removed with MAGI above …

Single, head of family, qualified widower (s)

$ 70,000

$ 85,000

Married spouse filing

$ 140,000

$ 170,000

Data source: IRS. Note: If you are using the separate marriage declaration status, you cannot use the student loan interest deduction at all.

Is your student loan eligible?

The second factor you need to know is whether your student loan debt qualifies for the deduction.

In summary, for a loan to be considered a “student loan” in the eyes of the IRS, it must have been taken out for the sole purpose of paying eligible educational expenses for you, your spouse or a dependent. at the time the loan was obtained. And the student must have been enrolled at least half-time in a diploma, certificate or diploma program at the time.

However, the loan does not need to be a official student loan. Obviously, if you get a direct federal student loan, it usually qualifies for the deduction. But if you’ve gotten a personal loan, home equity loan, or even used your credit card to pay for qualifying education expenses, that meets the definition of a student loan.

So what are eligible education expenses? This is a general term that refers to tuition and fees, accommodation and board, books, supplies and equipment necessary for participation, as well as some other expenses such as as defined by the IRS. To be eligible, expenses must occur within a reasonable time before or after taking out the loan, which the IRS defines as 90 days before or after the start and end of the academic period. In other words, you can’t pay the tuition and then try to call a personal loan that you got two years ago “student debt”.

How much could you save?

There is no simple answer here, as the potential tax savings depend on your marginal tax rate, or tax bracket. But for example, if you’re in the 22% tax bracket, the $ 2,500 student loan interest deduction could lower your tax bill – or increase your repayment – by $ 550. While this doesn’t completely offset the interest you pay on your student loans, it can certainly help reduce the financial burden.

[ad_2]

Share.

Comments are closed.