With student loan debt at over 1.46 trillion dollars and the interest on those loans being tax-deductible, what is a borrower to do? The New York Federal Reserve has some advice for those who are struggling. You are eligible for a student loan interest tax deduction if you borrowed money to pay for college or incurred credit card debt. This tax break decreases your taxable income by up to $2,500 and is only available on federal loans. Due to the ongoing pandemic, most federal students have paused their loans due from March 13th, 2020 onward- but there may be exceptions, so take a look at what applies specifically to you.
Can you deduct your student loans?
For your taxes for the year 2021, you can deduct up to $2,500 of student loan interest if you are single and have a MAGI of less than $70k. It is applicable for 2022 also. If your MAGI was between $70,000 and $85.0000, you could deduct less than the maximum of a full deduction at the level of $2 500. It’s important to note that this deduction isn’t taken as an itemized one but instead deducted from taxable earned income before they are applied to taxes which will help save you some money in tax brackets where it’s applicable.
The deduction can be made by whom?
There are instances in which you can deduct the student loan interest paid on your taxes: –
- You used a student education loan to pay tuition and room rental fees.
- For financing your education, you have taken a loan. This not only applies if you’re filing these taxes in postgraduate school but also if it is during when you’re still attending school.
- In addition, even if someone else was obligated to repay this debt on their behalf, it is eligible for student loan interest tax deduction. Like a parent PLUS Loan that they took out on their child’s behalf or other similar types of credits – they will be able to take any incurred student loan interest off through this deduction.
If you paid more than $600 in Interest to your student loan servicer or lender in 2021, the IRS would automatically send a form 1098-E. It shows your deductible interests for tax purposes. But if shutdown froze rates and payments suspended because of the shutdown, chances are you might not have exceeded $600 on your federal loans. If that’s true and otherwise qualifies, it may be possible to deduct any amount of Interest paid as well. To get a copy of Form 1098-E, contact them yourself if one doesn’t show up by mail or email. They should send it over. You can also request information about how much you owe online through their account portal, which might be available too.
Additional student loan interest tax deduction
If you’re still in school or paying for education expenses, the government offers additional education tax credits and student loan interest tax deduction. You can claim American opportunity credit (AOC) or lifetime learning credit if you don’t qualify for one of those two. You cannot claim these benefits if your gross income is above a certain threshold (currently $160k as an individual), but they are available even to people with student loans. Your payment and other factors can help determine which will save you more money when filing taxes. There’s no universally correct answer in that respect. As with the student loan interest deduction, married couples who file jointly are eligible to take advantage of these tax breaks, too. Single parents need not apply without a partner at their side.
Qualifications for student loan interest tax deduction
A few things qualified for the deduction, such as origination fees and capitalized interest.
- Loan origination fee: This is a one-time charge for creating and processing new loans. Starting September 1st, 2004, this fee will be included in your 1098-E information. For older loans, it’s up to you to calculate the Interest from the prices yourself using an annual calculator like the Flyfin tax calculator.
- Capitalized Interest is any accrued interest that gets added onto loan principal if not paid before time runs out. Be familiar with unsubsidized federal student loans while in school and during the grace period. Credit card debt also qualifies if used solely for paying qualified education expenses.
- Credit card interest Your credit card will be considered qualified as long as it is used only to purchase eligible education expenses and you have no other sources of debt. Interest on revolving lines of credit (including those from your cards) also qualifies if they are used exclusively for educational purposes.
- Interest on refinanced and consolidated loans If you take out a loan solely to consolidate or refinance student debt, the new Loan’s accumulated interest payments can also be deducted when filing taxes at year-end.
Other breaks in student loan interest tax deduction
The Lifetime Learning Credit (LLC) provides students with a maximum tax credit of $2,000 per year for qualified tuition and school-related expenses enrolled in an eligible post-secondary institution. This includes any undergraduate, graduate, or professional degree coursework used to pay for qualified expenses. There are no limitations on the number of years taxpayers can claim credit if they meet three criteria:
A) The taxpayer pays for their own qualified higher education expenses.
B) Someone else does if they designate themselves as a dependent.
C)The taxpayer is treated as an independent student and claims either themselves or one other person as their dependent.
To qualify for the tuition and fees tax credit, taxpayers must meet three criteria:
1) The taxpayer or their dependent pays qualified higher education expenses.
2) The taxpayer or dependent pays the qualified student’s expenses at an eligible institution.
3) Taxpayers are either student’s dependents listed on one’s tax return or spouses that file jointly with each other.
Summary-An intelligent way to decrease this expense is through taking advantage of the student loan interest tax deduction, putting some money back into your pocket while also reducing these costs overall. AI-enabled Flyfin calculator can help you out in this deduction matter smoothly.