For many taxpayers, college was an amazing experience, but also a very costly one. Most students graduate with some form of debt. The most frequent type of debt is in the form of student loans. Once you leave school and begin making your student loan payments, then you will also be able to claim a deduction for the interest paid on those loans. The benefit of this deduction is that you can lower your tax liability while paying down your debt. Consult with a tax professional, such as EB Tax Consultants in Brooklyn, NY, to determine how much of a deduction you might be able to claim.
Income Restrictions
While the deduction applies to both the interest paid on the required payments from your lender, but it also applies to the interest you pay on voluntary payments made to reduce your loan term. However, you need to be aware that while you can typically deduct all the interest you paid over the life of the loan, there are some income restrictions that can also come into play.
For example, if your modified adjusted gross income is $65,000 or less, then will be able to take the full deduction for your student loan interest. However, once that modified adjusted gross income goes above $65,000, then the deduction is gradually reduced and you cannot claim a deduction at all if your modified adjusted gross income is at $80,000 or more. Therefore, this deduction might not be possible for individual taxpayers filing a single return with higher adjusted gross income. However, your filing status also plays into the size of deduction available.
Filing Status
If you are married and filing jointly, then your income limits will rise to $160,000 before you will be unable to claim the deduction. However, if you are married and filing separately, you will be unable to claim the deduction. The same is also true if someone else is able to claim you as an exemption. Yet the deduction is available even if you choose not itemize. Additionally, you need to have your name or the name of your spouse on the loan in order to qualify for the deduction.
While overall this deduction can be beneficial, it typically favors newly graduated students who may have only worked for a relatively short period of time. For those higher earners, they may often find that other options can save them more than the deduction at tax filing time.
Eligibility Requirements for Taxpayers
Here are a few of the other requirements that you must consider before taking the deduction. One is you can claim the interest, even if you didn’t pay it yourself, if your name or your spouse’s name is on the student loan. As we have mentioned, a taxpayer that is a dependent on someone else’s return cannot take the deduction.
When the loan was used, the student must have been enrolled at least half-time in a program that led or is leading to a degree or certification. Your student loan interest is typically reported on a 1098-E, which will be mailed out in late January or early February. Depending on who services your loan, you may find that you can receive your 1098-E electronically to speed delivery. However, if you paid less than $600 in interest, the servicer will not necessarily send you a 1098-E.
Other Available Options
For high earners, the better financial choice may be to refinance your student loans to take advantage of the current low interest rate environment. This can be especially true if you do not qualify for or plan to use any of the income based repayment options offered by the federal government. Additionally, refinancing may also be a practical solution for those that are not eligible for any of the loan forgiveness programs.
Depending on the amount of your loans, refinancing may reduce your interest payments over the course of the year, thus matching or exceeding the $2,500 deduction that you might receive with a lower income. However, even if you are eligible for the deduction, it may still be worth contacting your servicer to determine if there are any refinance opportunities available.
Working with a tax professional, you can determine if you are eligible for a deduction and the amount of that deduction.
Click on the link below to connect with a tax professional at EB Tax Consultants in Brooklyn, NY, who can assist you in determining how much a deduction you
ERNIE BUSTAMANTE