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Are Student Loans Tax Deductible?

Going to college can be a time of growth and excitement, not to mention set you up for a productive career. But for many graduates, student loans are the college hangover that just won’t go away.

Student loan debt can follow you around for most of your adult life, causing financial stress and impacting your daily decisions. Yes, the Biden Administration has recently made some key changes to help borrowers of federal student loans, including up to $10,000 in debt cancellation (or $20,000 for Pell Grant recipients) for low- and middle-income households. But that may be just a drop in the bucket for borrowers who still owe significantly more than these caps.

While student loan repayments are not tax deductible, the IRS does offer some relief by letting you deduct student loan interest from your federal taxes. No matter how long it takes you to pay off your student loans, if you pay loan interest, you may be eligible for a deduction on your tax return. There is no limit to how many years you can take that deduction.

If you are just learning about this now, and are kicking yourself for not taking this deduction in previous years, there’s good news there as well: you can file an amended tax return to fix any mistakes made on prior returns, and potentially get back an extra refund.

Eligibility Requirements for the Student Loan Interest Deduction

As long as you have qualified student loans and your income is within the limits, you will most likely qualify for this deduction. The eligibility requirements for deducting student loan interest for both private and federal loans are as follows:

  • Your modified adjusted gross income (MAGI) is below the annual threshold. For tax year 2020, the phase-out begins at $70,000 (single) or $145,000 (filing jointly), and gradually drops to zero once your MAGI reaches $85,000 (single) or $175,000 (filing jointly).
  • You made qualified education expenses: You must have used the loan money for qualified expenses, like tuition, room and board, books, and other necessary educational purchases.
  • The loan was used for you, your spouse, or your dependent: If you took out a loan in your own name for your dependent, the loan interest is deductible.
  • No one can claim you or your spouse as a dependent: If you are someone else’s dependent, you cannot claim this deduction.
  • If you’re married, you’re filing jointly: If your status is married filing separately, you can’t take this deduction.
  • You’re legally obligated to pay interest on a qualified student loan: In the event that your wages are being garnished to repay a student loan, that interest is still deductible.

If you have any questions about your eligibility for this deduction, you should speak to a tax professional about this, and other educational tax breaks. If you take a deduction that does not apply to you, the IRS can assess penalties and interest against you.

How Can You Deduct Student Loan Interest

Taking this deduction should be a pretty straightforward process, and most tax preparation software should prompt you about payments for student loans and interest.

If you paid $600 or more in student loan interest, you should receive a Form 1098-E to report your interest payment on your tax return. Note that, with the pandemic, federal student loan payments and interest accrual were temporarily paused, and the deadline has been extended to at least December 31, 2022. So, you may not have paid enough in interest to receive a 1098-E. However, you can still deduct your student loan interest paid, and you can request that tax reporting documentation from your student loan provider.

Student loan interest deductions are capped at $2,500. For example, if you paid $8,000 towards your student loans and $2,800 towards the interest, you can only take a $2,500 deduction. Alternately, if you paid $3,000 toward your student loans and $1,000 towards the interest, then your deduction will be the total interest payment of $1,000.

You don’t have to itemize your deductions to take advantage of the student loan interest deduction. Instead, it works as an adjustment to your income. This is great news, because at this time, the standard deduction limits have been raised to $12,550 for single filers and $25,100 for married filing jointly. This makes the standard deduction a much more logical option for many filers.

RELATED: What Is The Difference Between Standard and Itemized Deductions?

Other Tax Breaks for Education

If you are considering further education, either for a degree or for personal development, there are more tax benefits that could apply to your situation.

Tax deductions reduce your taxable income, while a tax credit reduces the amount of taxes that you owe. Most tax credits are non-refundable, which means they only reduce your tax bill, but a refundable tax credit can increase your tax refund. A tax credit is always worth more than a tax deduction of the same amount.

You may be eligible for these tax credits for education:

  • The American Opportunity Credit can be used for a credit of up to $2,500 per year for the first four years of a student’s education towards a degree.
  • The Lifetime Learning Credit can be used for a credit of up to $2,000 per year for qualified educational expenses, even if they are for your own personal advancement and not towards a degree.

Both of these credits are non-refundable, and if you are eligible for both, remember that you can only take advantage of one of them per tax year.

Talk to S.H. Block Tax Services About Your Student Loan Interest Deduction

The tax professionals at S.H. Block Tax Services are familiar with the challenges of repaying student loans. While this tax deduction may only be a small relief, every bit helps. If you have any questions about how your educational expenses can reduce your tax bill, let us know!

For a free consultation about your taxes, or for any other questions, fill out our online contact form or call our office at (410) 793-1231 and we’ll see if we can help reduce your tax bill. We can also help with amending previous tax returns if you missed out on the student loan interest deduction for prior tax years.

The content provided here is for informational purposes only and should not be construed as legal advice on any subject.

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