Student loan interest deduction talks about an income tax deduction that gives borrowers the capacity to remove up to $2500 on the interest they paid on a student loan that qualifies from their income (taxable). Students and parents can take advantage of these tax breaks to help with their higher education fees.
How it works
Uncle Sam has various tax deductions which allow people to reduce their taxable income. Student loan interest deductions are one such channel. As a result, people in the 22% tax bracket qualify to claim the $2,500 deduction to reduce their federal income tax.
There are qualification criteria for taxpayers who want to take advantage of the deduction:
Parents are not qualified for the deduction, so the taxpayer, the spouse, or the dependent must take the student loan.
Such a loan needs to be applied during the academic period when the student is enrolled in a program that will qualify for a degree, certificate, or qualified credential.
Such loans can only be used for expenses that qualify. Such higher education expenses are fees, tuition, equipment, and supplies. Room, student health insurance, transportation, etc., do not qualify.
Such a loan must be used within a given time frame after it has been disbursed.
The student needs to be enrolled at an eligible institution
This deduction, unlike most deductions, is claimed as an adjustment to income on Form 1040. In other words, you need not fill out schedule A that is used for an itemized deduction.
Special Consideration
One can deduct as much as $2500 of the interest paid on a qualified student loan. Paying less will make your deduction capped on what you paid. Paying above $600 in interest, you should get form 1098-E from the lending firm.
Comparing Interest Deduction for Student Loan and Other Breaks
Students in higher education alongside their parents might qualify for other breaks and tax credits, alongside the interest deduction for a student loan.
Tax credits are pretty valuable compared to deductions since they will be removed from the tax you owe on a dollar-to-dollar basis, rather than just reducing the taxable income.
AOTC - American Opportunity Tax Credit
With AOTC, taxpayers can qualify and receive credit for qualified expenses that they paid for higher education for qualified kids during their first four years.
This entire credit is pegged at $2500 per kid for each year. Taxpayers get the full credit for the maiden $200 they used for expenses and 25% for the second $2000 spent for that student.
LLC – Lifetime Learning Credit
LLC gives a maximum tax credit of $2000 for each tax return for tuition and school expenses that qualify. In other words, all qualified expenses that are directed for payment of graduate and undergraduate courses for a professional degree qualify. It doesn’t come with a year restriction.
However, taxpayers must meet some three criteria to claim the credit:
Payment for such qualified higher education expense must be by the taxpayer, their dependent, or another party
Such student must be enrolled in a higher education institute that qualifies
The taxpayer must be the student, spouse, or a dependent as listed on the tax return
From 2021, the amount allowed for AOTC and LLC starts disappearing for single taxpayers with Modified Adjusted Gross Income of more than $80,000 and double for joint filers.
College Savings Plan
There can be tax benefits also if you take part in a 529 plan. With this saving plan, you get some tax advantages as a parent since it allows you to save for your kid's education. The 2017 Tax Cuts and Jobs Act (TCJA) expanded the rules, and it also included an annual tuition payment of $10,000 for the K 12 program at public, private, and religious schools.
FOR MORE INFORMATION ON HOW ROSOVICH & ASSOCIATES, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
