Student loan interest can quickly add up. That’s why the Federal government introduced the student loan interest tax deduction to help ordinary students out. If you made interest rate payments on your student loans during the tax year, you could deduct up to $2,500 in interest paid.
If you happen to qualify for the 22% tax rate, you have the best deal because your maximum deduction is $550. A few hundred dollars in your wallet for doing very little sounds great, so how can you make sure that you claim the maximum deduction amount available to you?
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What You Need to Know About the Deduction for Student Loan Interest
Whenever you pay off your student loan, it’s not a case of just paying off the amount you borrowed. You’re also paying the interest rates. When you take advantage of the student loan interest tax deduction, you’re essentially taking off the interest paid against any taxable income, which ultimately means you pay less in tax to the Federal government.
For example, let’s say your income came in at under $65,000 for the previous year. You will qualify for the maximum interest rate deduction. From $65,000 to $80,000, this deduction is reduced.
You can take this deduction without itemizing. So, you can also take the standard deduction.
Take note that if your parents took out the student loan in their name, they would have to claim the deduction on their tax return. However, if your parents registered you as a dependent, neither can claim the deduction.
Finally, you can also take this deduction if you’re paying off your student loan while still in school full-time.
Are There Any Other Deductions for My Education?
The American Opportunity Tax Credit is the best tax credit for claiming back cash when you’re still in school. If you meet the conditions, you could claim up to $2,500. The Lifetime Learning Tax Credit can also be claimed and is worth $2,000. But do keep in mind that you can’t claim both.
You must examine the conditions of each and see which credit would be best for you.
When married and filing jointly, you have two choices. You can claim the student loan tax interest rate deduction or one of the above education credits.
Is Student Loan Refinancing the Best Option for You?
That depends on your situation.
First, you need to work out what you already owe and the interest rate on that. Then, if you have more than one loan, you’ll need to calculate your average interest rate.
Then you need to compare what else is available. The higher your credit score, the lower your interest rate. We recommend using a 5% interest rate if you’re unsure what your credit score is.
Repeat the first step with the new loan available and see if you will actually save money in the long run. If so, you should refinance your existing student loan.
Is it Necessary to File a Tax Return?
If your earned income exceeds $12,000, you must submit a tax return. This applies even if you were claimed as a dependent on your parent’s tax return. If you fail to do so, the IRS will charge you 25% (or more) extra on top of your existing tax bill. Plus, you won’t be entitled to any tax refund.
The IRS still recommends filing a tax return even when your income is under $12,000. By doing that, you’re entitled to claim a tax refund. It’s extra money for a little paperwork, so it’s worth filing regardless.
Are Your Parents Able to Claim You as Dependent on Their Tax Return?
Yes, your parents can claim you as a dependent when they file their taxes. But some criteria must be met first:
- First, you must be 19 or younger and live with them for six months.
- Second, your parents must have provided you with more than 50% of your total finances for the year.
- Third, you’re 24 or younger and are in school full-time.
- Fourth, you have a complete and permanent disability.
If your parents have claimed dependency for you, you subsequently can’t claim dependency for yourself, and you can’t get education credits or the student loan deduction.
Are Your Scholarships Taxable?
Fellowship money and scholarships are exempt from taxes. So if your scholarship isn’t taxable, you don’t need to add it to your tax return. However, take note that the portion of your money that’s used for rent, travel, nonessential equipment, or research is taxable. This must be reported with your gross income.
How Can I File My Next Tax Return?
The tax filing deadline for 2019 was April 15th. Most students and graduates will use online tax preparation software to make it easier to file their tax returns.
These programs are ideal because they will guide you through everything, and all you must do is enter some basic information about your income and circumstances. It will then provide a recommendation as to which credits and deductions you should take.
What Paperwork is Required to File Your Taxes?
There are three documents you’ll need to fill out your taxes. These are:
Form W-2 – This is your tax statement detailing your earnings. You’ll get the W2 form through your employer
Form 1098-T – Students will receive this from their school. It’s a tuition statement.
Form 1098-E – Your statement for any interest paid on your student loan. If you happened to pay interest on your student loan, you’d get one of these. If you paid at least $600, you’d receive this through email or via the mail.
If you paid less, you’re still able to take this deduction, but you’ll need to contact your loan provider to receive it.
We also recommend saving any receipts from any educational purchases you made. This includes books and tuition. You should also have a record of any scholarships, as you’ll need these figures to file your tax return.
What if I Went to School in Another State?
If you had a job and paid income tax in another state, you’ll need to file state tax returns for both the state you studied in and the state you come from. But laws vary on this issue, so you should find out more information about this.
Most tax preparation platforms already have this built-in, so you’ll know when you try to file.
What if Made an Error on My Tax Return?
Mathematical errors tend to be caught immediately by the IRS. They will tell you about these, and you’ll be asked to send additional information.
But if you simply didn’t claim every credit and deduction you were entitled to, all is not lost. It’s possible to submit an amended return to the IRS. There’s a three-year deadline from when you filed the return and a two-year deadline for paying any tax owed.
Traditional tax accountants and online tax preparation software will allow you to do this.
How Can I Claim the Student Loan Tax Deduction?
The tax filing deadline is usually April 15th. Most students and graduates will use online tax preparation software to make it easier to file their tax returns.
These programs are ideal because they will guide you through everything and help you claim all the student tax deductions you qualify for. All you have to do is enter some basic information about your income and circumstances. It will then provide a recommendation as to which credits and deductions you should take.