If you’re paying back your student loans, you’re probably frustrated with how much of your monthly payment goes toward interest. There’s one small silver lining to making big interest payments, though: you might be able to deduct them from your taxes to reduce the amount you have to pay the federal government.
According to the IRS, more than 12 million people took a student loan interest deduction in 2015, the most recent year for which data is available. This is a popular deduction because it’s easy to claim since you don’t have to itemize, and because a lot of people with student loan debt are eligible.
If you’re one of the millions eligible to deduct student loan interest from your taxes, you could save a significant amount of money — but you need to know how the deduction works so you can make sure to claim it properly.
Here are seven key facts to know when claiming the student loan interest deduction for 2017 taxes and beyond.
1. Not all loans are eligible for the student loan interest deduction
The student loan interest deduction may be available to you if you meet certain key criteria. According to the IRS, student loan interest is tax deductible if:
- You took out the student loan for yourself, your spouse, or any person who was a dependent at the time when you borrowed. The deduction is available for both federal loans and private loans.
- The loan was taken out to cover the costs of educational expenses during an academic year. You can only deduct interest if the student loan covered school-related expenses, including tuition or room and board. If you funded personal expenses not directly related to your education, like buying a car while in school, you’re supposed to reduce your deduction.
- You were legally obligated to pay the interest on the student loan. If you pay on your child’s student loan but aren’t obligated to pay the interest, you can’t deduct it.
2. The student loan interest deduction allows you to deduct up to $2,500
If you meet all of the eligibility criteria, the maximum amount of interest you can deduct per year is $2,500. If you paid more than this amount, you cannot deduct the additional interest paid.
This is a deduction, not a credit. That means you subtract the amount of deductible interest from your taxable income. For example, if you had $45,000 in taxable income last year and paid the full $2,500 in deductible student loan interest, your deduction would reduce your taxable income to $42,500.
Credits, on the other hand, reduce the amount of taxes you pay. If you owed $6,750 in taxes and had a $1,000 credit, you’d only owe $5,750.
Deductions aren’t worth as much as credits — but they can still save you money. If you’re still in school, you may be eligible for tax credits such as the American opportunity tax credit. However, there are no tax credits for student loan interest; the deduction is your only option to save on your taxes based on paying your student loans.
3. You don’t need to itemize to take a student loan interest deduction
The student loan interest deduction is an above-the-line tax deduction, according to CNBC, which means the deduction directly reduces your adjusted gross income. You input the amount of deductible interest on Line 33 on your 1040 or 1040NR form and it reduces your adjusted gross income. You don’t have to itemize your taxes to claim the deduction, but you cannot use the 1040EZ or 1040NR-EZ if you want to claim this deduction.
Being able to claim the deduction without itemizing is a big benefit. In December 2017, President Trump signed a tax reform bill that nearly doubled the standard deduction, which means far fewer people will itemize going forward. If using the standard deduction makes sense for you, you don’t have to worry about missing out on the student loan deduction.
4. The deduction could save you hundreds
The exact amount the deduction will save you varies depending on your tax bracket. The tax brackets are changing in 2018 thanks to tax reform, which means you might be taxed at a different rate next year than you will be when you file your taxes for 2017. The value of the student loan interest deduction will change if your tax bracket does.
You can estimate how much your deduction will be worth by multiplying your deductible interest by your tax bracket. For example, if you’re in the 25 percent tax bracket and you take a $2,500 deduction, your deduction would be worth $625 ($2,500 x 0.25).
Because your deduction reduces the amount of income taxed at your highest marginal rate, this calculation works in most situations since taking the deduction means you have less income being taxed at the highest rate you pay.
If your deduction drops you down to a lower tax bracket, the calculation is more complicated because you’re avoiding taxes on some of the income taxed at your highest marginal rate as well as some of the income that is taxed at the lower rate.
To make it easy to estimate how much your deduction is worth, you can use our student loan interest deduction calculator. You’ll need to input details about your income, your tax filing status, whether you were claimed as a dependent, and the amount of student loan interest paid.
For example, if you made $54,000, were single, and paid $1,000 in student loan interest, your $1,000 deduction would be worth $250 on your 2017 taxes.
5. There are income limits
The student loan interest deduction phases out at higher incomes, so you’ll be ineligible to claim the deduction if you make too much money.
- If your income is under $65,000 or $135,000 if filing as “married, filing jointly,” you can claim the full student loan interest deduction
- If your income is between $65,000 and $80,000, or between $135,000 and $165,000 if “married, filing jointly,” your deduction begins to phase out and its value is reduced.
- If you make more than $80,000 or $165,000 if “married, filing jointly,” you aren’t eligible for the student loan interest deduction.
6. You’re not eligible if you’re a dependent or if you file taxes as ‘married, filing separately’
There are a few final key eligibility criteria to meet, even if you fulfill other requirements in terms of income and having an eligible loan. In order to be eligible to claim the deduction:
- You must not be declared as a dependent on anyone else’s tax return. Parents often claim children as dependents.
- You must not file your taxes as “married, filing separately”.
If you’re a dependent or are married, but filing your taxes separately, you’re out of luck and there’s nothing you can do to get the student loan interest deduction.
7. Your student loan servicer will send you a form to help claim the deduction
If you’re planning on claiming the student loan interest deduction in 2017 and beyond, you don’t have to worry about keeping track of interest all year long. Your student loan servicer will send you a 1098-E form giving you the total amount of interest to input onto your 1040 form. Here’s what this form looks like:
Just take the information from the box that says “Student loan interest received by lender,” and input that number right into Line 33 on your 1040 form. If you use an online program to do your taxes, the program will prompt you to provide the necessary information. That way, you can effortlessly claim your student loan interest deduction and enjoy a tax break in exchange for all of that interest you’re forced to pay.
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