Amid all the cautionary advice to prevent students from borrowing too much money to pay for their university education, one bit of good news may go unnoticed: interest paid on student loans is tax-deductible, and a significant amount of fees and tuition paid while seeking a degree, can be offset with tax credits.
Student loans make going to the college more affordable but can create mountainous debt that takes many years to pay off. These loans, which cannot even be discharged in bankruptcy court, are a benchmark for the millennial generation, many of whom find themselves in debt early in adulthood.
Tax credits and deductions that can save financial lives
Deductions reduce taxable income and are called Student Loan Interest Deduction and the Tuition and Fees Deduction.
Two other savings are tax credits, which decreases the amount of taxes paid. These are the American Opportunity Tax Credit and the Lifelong Learning Credit.
The IRS sets guidelines for the use of these deductions and credits, and they are complex. If you qualify, consult the IRS or a tax preparer to determine how they suit your situation.
Student Loan Interest Deduction
The student loan interest deduction can be used by borrowers to reduce their taxable income to $ 2,500, provided that their variable gross profit is less than the specified limits.
The interest deduction on student loans is what tax accountants call the "above the line" deduction, which means that you can claim it even if you don't specify other deductions. The student who took out the loan must be you, your spouse, or dependent for you to take the deduction. The borrowed money must be a business student loan, used exclusively for education-related expenses, and the borrower must be enrolled at least half the time to qualify.
Loans from another family member, certain businesses and organizations, or loans from a qualified employer plan are not eligible.
A taxpayer, spouse, or dependent can benefit from the deduction as long as the person is legally responsible for paying the loan and cannot claim as an exemption from another person's tax return. Until the loan is canceled, all interest paid during the year can be deducted up to the legal limit. The deduction can be exacted even if the taxpayer does not specify the deductions.
Qualified expenses you can pay for with the loan money include:
Books, equipment, and consumables.
Other necessary expenses, including transportation
Room and Board
Tuition and Fees
To be eligible, individual filers with MAGI (modified adjusted gross income) of less than $ 80,000 and couples with an income tax return of less than $ 165,000. The amount of the deduction begins to disappear for people with a MAGI of more than $65,000 and couples with over $165,000.
Tuition and Fees Deduction
The tuition and fees deduction can decrease your taxable income by up to $ 4,000. It is available for individual filers whose adjusted gross income does not exceed $ 80,000, and for combined files whose combined MAGI does not exceed $ 160,000. The deduction only applies to tuition and fees at qualified post-secondary institutions, but cannot be applied to accommodation and food.
You could deduct the deduction for qualifying expenses even if you paid with borrowed money. The deduction can also be made if you have paid interest on the student loan, and these charges still allow you to deduct the interest deduction on the student loan.
As with the student loan deduction, the tuition and fees are above the tax return line, which means it is available even if no deduction is specified in the tax listings. As a student loan deduction, the amount you can gradually deduct is between $ 65,000 and $ 80,000 for individuals and between $ 130,000 and $ 165,000 for couples with a joint declaration.
Tuition and fees deduction cannot apply in certain circumstances, such as:
Expenses paid for scholarships or tax-exempt prizes or tax-free withdrawals from an Education Savings Account (ESA), or College Savings Plan cannot be deducted.
If you are claimed as dependent on someone else's tax return
If you are married and file your taxes separately
You are a non-resident alien during the exercise and choose not to be treated as a resident alien
You claim either The American Opportunity tax credits or the Lifetime Learning in the same tax year
Lifetime Learning Credit
The lifetime learning credit, up to $ 2,000 per year, is intended for low- and middle-income taxpayers who have paid for higher education but who are not eligible for tax exemption under stringent United States tax credit requirements.
The Lifetime Learning Credit does not require a student to graduate or enroll in AOTC at least half the time. It also removes the AOTC limit on a loan for the first four years in a graduate or certificate program only.
To claim a credit, taxpayers must attach a 1098-T Form from the academic institution where they studied and complete an 8863 tax form and attach it to the 1040 or 1040-A tax return.
Lifetime learning credit does not limit the number of years that a loan can be applied for. This makes the credit particularly useful for graduate students, part-time students, and those taking courses to improve or acquire professional skills, and not necessarily to graduate.
Eligible expenses include tuition, fees, and all books and equipment requested by the school. It is impossible to claim a credit for accommodation and food or expenses paid from a scholarship, employer, or education savings account.
The loan is phased out for individual taxpayers, starting at $ 55,000 and is not accessible to those whose adjusted gross income exceeds $ 65,000. For couples making a joint return, the loan is available for a MAGI of $ 110,000 and is gradually reduced to a maximum MAGI of $ 130,000.
The Lifetime Learning Credit cannot be applied in the same fiscal year for the same student if America opportunity credit or commission deduction is claimed.
The loan is worth up to 20% of the first $ 10,000 of qualifying expenses, and a deduction is allowed for each tax return, so if a parent has more than one student, only one credit can be given for life.
American Opportunity Tax Credit
The American Opportunities Tax Credit (AOTC) isn't easy to obtain, but it can make college payments much easier. The loan allows you to withdraw up to $ 2,500 in fees for each of the four years you are pursuing a college degree.
To be eligible, a student must be enrolled in an appropriate program at least midway through the term and not have a criminal drug conviction. It only applies to the first four years of college, so students who have completed four full years of study are no longer eligible.
The AOTC offers a 100% credit for the first $ 2,000 of eligible educational expenses and a 25% credit for the next $ 2,000, up to a maximum of $ 2,500. It requires an entirely separate receipt of the Form 1098-T and an attached Form 1040 tax return from the institution where the student is enrolled.
The AOTC cannot be used for board and lodging, transportation, insurance, medical bills, or other expenses if not required. Also, it is not possible to claim the AOTC in the same year with a tax deduction, and the student will not be able to deduct taxes and fees if someone claims their AOTC when filing their declaration during the same fiscal year.
Taxpayers are not required to record the deduction in any given year, provided they do not exceed the four-year limit. Therefore, if a student completes high school and enrolls in college in the fall semester, the credit should not be received that year.
Independent students who do not request exemptions from their parents' income tax return are eligible for the AOTC. Otherwise, your parents can request credit. 40% of the credit to which they are entitled, up to $ 1,000, is "refundable," which means that a taxpayer can recover his money, even if no tax is due during the year.
Full credit is available for individual participants with a MAGI of $ 80,000 or less and married employees with a MAGI of $ 160,000 or less. A partial loan is available for MAGI up to $ 90,000 for individual taxpayers and
$ 189,000 for jointly profitable couples.
