With less than a month until the April 18 tax filing deadline, you might find yourself scratching your head as you hurry to complete your tax forms. You’re not alone if all the rules and terminology surrounding taxes and student loans are confusing to you – our latest survey finds most taxpayers are uncertain about them, too.
For instance, do you know the difference between a tax credit and tax deduction? Are you aware of all the tax benefits available to you if you have student loans?
See how your knowledge compares to the rest of the country below (and get the real answers once and for all).
Tax credits vs. tax deductions
Before getting into the nitty-gritty of claiming student loan tax credits and deductions, we wanted to find out how well taxpayers understand the difference between a deduction and credit.
We asked survey participants to tell us whether the following statement was true or false: “Tax credits and tax deductions are the same thing and have the same impact on your taxes.”
- True: 17%
- False: 52%
- Don’t know: 31%
About a third of respondents weren’t sure, while 17 percent incorrectly believed that tax credits and tax deductions are synonymous and affect taxes in the same way.
The truth is that while both credits and deductions can reduce your overall tax bill, they are applied and affect your taxes differently. A tax credit lowers what you owe in taxes by providing a dollar-for-dollar reduction of your tax bill. A tax deduction, on the other hand, reduces your overall taxable income.
Claiming the student loan interest deduction
Here’s where things get trickier – we next wanted to learn how well taxpayers understand the tax benefits available to student loan borrowers. So we tested survey respondents on the rules for claiming the student loan interest deduction.
We asked: Can someone claim a tax deduction for student loan interest for payments they’ve made on behalf of another person?
- Yes, they can: 16%
- No, they can’t: 28%
- Don’t know: 56%
Again, many respondents admitted to not knowing the answer. Another 16 percent answered incorrectly. The rest – just 28 percent – knew that only the person legally responsible for paying back the loan is able to claim a tax deduction on the interest.
Digging deeper, we then asked respondents to select whether the following statements regarding the student loan interest tax deduction were true or false.
Someone who has student loans can claim the student loan interest deduction…
If they are not itemizing taxes:
- True: 17%
- False: 22%
- Don’t know: 60%
If they don’t receive a tax form 1098-E:
- True: 11%
- False: 20%
- Don’t know: 69%
If someone else made payments on their behalf:
- True: 15%
- False: 26%
- Don’t know: 59%
Few respondents knew that it is possible to claim the student loan interest deduction in all of the above scenarios, correctly answering “true” for each question.
It’s important to know that you can claim the interest deduction even if you’re not itemizing taxes, as it’s an “above the line” deduction.
Further, if you paid less than $600 in interest last year, you probably won’t’ receive tax form 1098-E. However, you can claim the deduction regardless. Simply contact your loan servicer to find out how much interest you paid.
And finally, even if someone else made your student loan payments on your behalf, you can still deduct the interest if you’re the one legally obligated to pay it.
Clearly, the rules surrounding student loan tax benefits are complicated. But with so few taxpayers aware of the rules for claiming this major tax deduction, it’s possible quite a few student loan borrowers are missing out on money – up to $2,500 off their taxable income.
Tax return spending in 2015 vs. 2016
Despite all the confusion surrounding taxes, those who receive a refund are at least putting those funds to good use, for the most part.
We also polled survey participants to find out how they spent their tax refunds in 2015 versus how they plan to spend the money this year.
Of those who received or plan to receive a tax refund, the top responses included using the funds to pay off debt (44% vs. 39%, respectively), followed by spending it on something needed such as home repairs (26% vs. 23%), and putting the money in a non-retirement savings account (17% vs. 19%).
Which, if any, of the following did you do with your tax refund last year (i.e., in 2015)? Please select all that apply.
- I used it to pay off debt: 44%
- I spent it on something I needed (e.g., water heater, home repairs, etc.): 26%
- I spent it on an item(s) I wanted (e.g., TV, car, etc.): 19%
- I put it into a non-retirement savings account: 17%
- I spent it on a vacation: 12%
- I put it into a retirement account (e.g., 401(k), IRA, etc.): 5%
- Other: 10%
- Can’t recall: 9%
And which, if any, of the following do you plan to do with your tax refund this year? Please select all that apply.
- I will use it to pay off debt: 39%
- I will spend it on something I need (e.g., water heater, home repairs, etc.): 23%
- I will put it into a non-retirement savings account: 19%
- I will spend it on an item(s) I want (e.g., TV, car, etc.): 14%
- I will spend it on a vacation: 10%
- I will put it into a retirement account (e.g., 401(k), IRA, etc.): 5%
- Other: 8%
- I haven’t decided yet: 19%
Clearly, debt repayment continues to be a top priority for Americans. And the more educated you become about the tax benefits available to you, the more money you can save when you file your taxes, which you can put toward major financial goals like living a debt-free life.
Student Loan Hero commissioned YouGov PLC — a third party, professional research and consulting organization — to poll the views of a representative sample of 1,108 American adults. Fieldwork was undertaken between the 1st and 2nd of March 2016.