It’s that time of year again … tax time! Whether you like it or not, April 15th is inching closer, and knowing how to handle student loans on your tax forms can help you save money.
Student loans and taxes — two of your favorite things, right? Okay, we know both can be confusing and frustrating. But here are the facts you should know to help you make sense of it all during tax time.
5 key facts about student loans and taxes
1. Are student loans tax deductible?
While many people may be eligible for the student loan interest deduction, it’s important to know that only the interest (not the payments) is deductible up to $2,500. Depending on interest paid and your income, you can get up to $625 back using this deduction.
2. Credit card interest could be tax deductible too
…If used toward qualified education expenses. The catch: every item charged to the card has to be exclusively for qualified expenses or you can’t write it off at all.
Eric J. Nisall, founder of AccountLancer, stated, “Even a single non-qualified purchase on the card makes all the interest non-deductible.”
3. Student loan help through your job
If your employer helps pay off your student loans, it might be considered compensation and subject to payroll taxes.
4. What about gifts from family?
If you get the deal of a lifetime and your parents or another relative pay off your student loans, it will be considered a non-taxable gift to you. However, the benefactor in question may need to file a gift tax return and pay taxes on the total gifted.
5. Tax implications of default
If you stop making payments and default on your student loans, Uncle Sam may intervene and garnish your tax refund until your debt is paid off.
How to deduct student loan interest
Student loans are a drag, but as mentioned above, the good news is you can at least write off some of the interest.
According to the IRS, you can claim this student loan tax deduction if all of the following apply:
- You paid interest on a qualified student loan during the tax year for which you are filing
- You are legally obligated to pay interest on a qualified student loan
- Your filing status is not “married filing separately”
- Your modified adjusted gross income (MAGI) is less than a specified amount, which is set annually
- You or your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return
In order to qualify for the interest deduction on your taxes, your MAGI must be less than $80,000 ($160,000 for couples filing jointly).
Both federal and private student loans qualify for this deduction. If you paid at least $600 in interest (which isn’t hard to do, sadly), be on the lookout for student loan tax form 1098-E from your loan servicer, which illustrates how much interest you paid throughout the year. You’ll input that amount on tax form 1040.
You can make the process even easier by using a service like TurboTax or TaxACT, or by seeking professional help from an accountant.
Something to note is that only you, the borrower, can deduct the student loan interest on your taxes. If Mom and Dad help you out with some student loan payments, they are not eligible for this student loan tax deduction.
Nisall explained, “Only the person who is legally obligated for paying the debt is allowed to claim the deduction. The person who is legally obligated doesn’t have to make the payments, but is the only one who can claim the deduction. Even if the legally obligated person is claimed as dependent, the taxpayer claiming the legally obligated person still cannot take the deduction.”
Wondering how much you can save with the student loan interest deduction? Find out with our deduction eligibility quiz!Start the Quiz
Refinancing and the student loan tax deduction
We’ve talked a lot about student loan refinancing on Student Loan Hero. It’s one of the best ways you can consolidate your loans into one monthly payment and potentially get a lower interest rate, too.
If you choose to refinance your student loans, you may wonder if student loan interest is eligible for tax deductions.
The verdict? Most likely. “As long as the money from the loan was used for qualified education purposes, interest paid on refinanced loans is eligible for deduction,” said Nisall.
But if you refinance more than the original value of your student loans, probably not. Nisall added, “However, if a loan was refinanced for more than the original value, and the additional money wasn’t used for qualified education expenses, none of that interest is deductible.”
As you can see, there are many nuances to student loans and taxes. When in doubt, talk to a tax professional about your individual situation to see if you’re eligible for any deductions or credits.
Get your paperwork ready early, such as your 1098-E (typically available by January 31) and get your taxes over with. Who knows, you may even get a refund, which you can put toward your student loans!
Either way, starting early and being organized can make tax season a lot less hectic and stressful.