Are there two phrases more anxiety-inducing in the English language than “student loans” and “taxes”? Probably not. What about student loans and taxes together in one complete thought? That’s probably enough to send you reaching for a paper bag to breathe into; however, it’s actually not a bad thing because a portion of your student loans is tax deductible!
Now, before you get too excited, there are some caveats. Here’s what you need to know about the Internal Revenue Service guidelines on the student loan interest tax deduction:
Here’s what you need to know…
- Your student loan is deductible, but not all of it. The principal amount of your student loan repayment can’t be deducted; however, the interest paid on the loan throughout the year is tax deductible up to $2,500. Federal and private loans both qualify for this tax deduction.
- There are some income limitations on the student loan interest tax deduction. If your modified adjusted gross income (MAGI) is less than $65,000 when filing as single or less than $130,000 when filing as married with a joint return, then your student loan interest deduction is not affected by any limitations. However, if your MAGI is between $65,000 and $80,000 single or $130,000 to $160,000 married, then your deduction may be reduced because of a “phaseout” where the deduction is gradually decreased. If you make more than $80,000 single or $160,000 married, then you do not qualify for the tax deduction.
- There are a few other requirements that need to be met. According to the IRS, you can claim the deduction if you meet all of these requirements:
- Your filing status is single or married filing jointly.
- No one else is claiming an exemption for you on his or her tax return.
- You are legally obligated to pay interest on a qualified student loan.
- You paid interest on a qualified student loan.
- Once you’ve met the requirements, reporting is easy. If you paid more than $600 in student loan interest, you’ll receive a student loan tax form 1098-E from your loan provider. You’ll input this amount on tax form 1040 to claim the deduction. If you don’t get a Form 1098-E you can still claim the deduction, you’ll just have to keep a record of your student loan interest payments.
For more information about the student loan interest tax deduction, refer to IRS Publication 970 or contact your loan provider or tax specialist.