If you have student loans, you may be wondering if you qualify for a tax break, meaning you can deduct the amount of your loan interest up to $2,500 a year. However, if you file as single and you make more than $70,000 a year, that amount is phased out on a tier system so you may not qualify for the full $2,500.
This is an above the line deduction, which means you do not need to itemize to take full advantage of this tax deduction. This can be ideal for many recent college graduates as they may not begin itemizing the first few years that they are working.
- You may deduct up to $2,500 or the amount of interest you actually paid during the year.
- If you're a single filer and make more than $70,000 a year, that amount is phased out on a tier.
- You will not be eligible for the student loan interest deduction if your adjusted gross income (AGI) exceeds $85,000 a year.
- Your student loan provider should send you at 1098-E form at the end of the tax year or the following January with the amount of interest you can claim on your taxes that year.
How Do I Take the Deduction?
You will need to file a 1040 form with Schedule 1 in order to claim this deduction. Your student loan provider will send you at 1098-E form at the end of the current tax year or the following January with the amount of interest you can claim on your taxes that year. Be sure to wait for the form before you file your taxes. It is also important to keep your address updated with your loan company so you can receive the information.
If you have student loans with multiple companies, be sure that you wait for each company to send you a 1098-E before you file your taxes. This can help you avoid needed to amend your tax return and increase that amount your receive back in taxes.
Should I Avoid Paying Off My Student Loans Because of the Tax Break?
Many people look at the tax break as a reason to not worry about paying off their student loans right away. Only the interest is tax-deductible so you are not making up any money that you would not be paying out anyway. It is important to do something about your student loans today. You can look at it as either paying the money in interest or in taxes.
If you paid off your student loans, you would have that extra money each month and just pay a bit more in taxes each month. This will give additional money in your budget each month. If your student loan interest rate is low and you have other debt, you may consider putting your student loan at the end of your debt payment plan. This will allow you to take advantage of the tax deduction as long as you still have debt, but you should not keep the loan in order to take the tax deduction.
Eliminating your debt as quickly as possible can make it easier to reach your other financial goals and to do the things you want to, like purchase a home. Once you purchase a home, you can deduct the interest you pay on a mortgage and the allowances are higher than for student loan interest.
Don't Forget To Save on Your Mortgage Interest
Once you have the mortgage, the same logic can be applied to the tax deduction on mortgage interest. You should focus on the payment that you are keeping in order to save a small percentage of your taxes. Ultimately, you do not get to keep the money you either pay it to the bank or to the government. Putting off paying off your student loans or your mortgage because of the tax deduction just does not make logical sense. It makes more sense to get out of debt and work on building your wealth.
Take Advantage of All Possible Tax Credits and Deductions
In addition to the deductions you may qualify for, you should look into any tax credits you qualify for. The tax credits may be refunded to you if you have extra money after you have covered your tax bill. When you file your taxes, you should either use tax software that is designed to help you find all the deductions and credits you qualify for or go to a tax accountant who can help you find ways to save on your taxes. If you are self-employed or just starting your business, you may want to use an accountant so that you file everything correctly in your first year or two in business.
Frequently Asked Questions (FAQs)
Is student loan interest deductible?
You can deduct interest you paid on a student loan if you took out the loan to pay "qualified education expenses" for yourself, your spouse or for someone who was your dependent at the time you took out the student loan. Qualified expenses include tuition and fees, room and board, books and supplies, and transportation.
Why is my student loan interest not tax deductible?
You will not be eligible for the student loan interest deduction if your modified adjusted gross income (MAGI) exceeds certain limits. For instance, if you're a single filer and your MAGI is more than $85,000 a year, you cannot get the deduction. In 2021, to take the full deduction, your MAGI must be under $70,000 for single filers or under $140,000 for joint filers. A partial deduction is allowed for single filers with a MAGI between $70,000 and $85,000 and joint filers with a MAGI between $140,000 and $170,000.