The student loan is usually the go-to option when they face challenges. Both parents, guardians, and students rely on this loan in a hard time, not knowing the ups and downs of the loan. If you have a loan to pay or are thinking of taking one, keep in mind that the big part of the payment is the repayment of the interest. Student loan interest is based on the amount you borrowed, which can be a lump sum. A student must pay the loan back in full before the expiring date because delay only accumulates more interest. Payment may become frustrating because of the interest, which may take a long time to pay back.
The cry for help has been heard with the creation of different ways to lighten the interest payment. As a result, one way is through student loan interest deduction. This article will shine a light on how you can enjoy this trick.
What Is the Student Loan Interest Deduction?
Student loan interest deduction is imposed on federal tax, which enables borrowers to deduct $2,500 from the interest to be paid as part of their taxable income. This method is the easiest among others to help students pay for education. However, the benefit is not free but comes with criteria to be met, such as filing status and income level.
How the Student Loan Interest Deduction Works
The IRS allows a tax deduction on certain taxes. The deduction is done each tax year, and the student loan is one. Students among the 22% of borrowers can claim the mentioned amount with an additional reduction of $550.23 from their federal income tax.
If you are interested in enjoying this privilege, you must meet these criteria.
The loan must be taken by the taxpayer, his/her spouse, child, or children. The claim is not available to the parent who makes the payment on behalf of the borrower.
The student must be at least enrolled half-time, and the academic session must be ongoing to ascertain a certificate or other qualified credential.
The benefit is for those who use the loan for higher education expenses. It includes all expenses except insurance, medication, room and board, and transportation.
The loan is limited to a disbursement period of 90 days before or after the academic calendar starts but must be used within a short period after taking out.
The institution must be recognized with accreditation, non-profit, privately owned for profit, etc. The institution must be covered under the student aid program organized by the United States Department of Education.
The student loan is considered an adjustment income and filed through Form 1040, eliminating the need to file a Schedule A.
How to fill a student loan interest deduction
Fortunately, you don’t have to itemize to claim a student loan interest deduction. You should expect an IRS Form 1098-E if your interest payment exceeds $600. The form contains the amount paid in interest on the loan. Some lenders, however, don’t issue Form 1098-E, but that’s not a problem. If you don’t get one, call them and ask for more information on your loan and the interest accrued on it. Or you can get this information through the service provider’s website.
However, the IRS discourages a borrower from calling a lender to ask for the 1098-E form, an explanation, or how to file a deduction for the interests paid. Instead, the IRS website provides all the necessary details to claim this status.
Once you get the amount, you can file the correct amount on the form and then submit it to the IRS.
FOR MORE INFORMATION ON HOW JIM McCLAFLIN, EA, NTPI FELLOW, CTRC CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLlICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Jim McClaflin, EA, NTPI Fellow, CTRC