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If you’re paying down your student loan debt, you know your total monthly payments are a mix of principal and interest. But did you know that by filling out and filing the Form 1098-E, you may be able to deduct student loan interest on your taxes?
The ability to deduct student loan interest isn’t automatic, however; you must meet certain qualifications. Here’s what you need to know about the form, and whether you may qualify for a student loan interest deduction.
- 6 questions about the 1098-E, answered
- How to read Form 1098-E
- Other information to know about student loans and taxes
- How to use your tax refund
Now’s your chance to fill one out and take advantage of some potential student loan tax breaks. Here are some key questions on the 1098-E:
1. What exactly is the 1098-E form?
2. How can I qualify for the student loan interest deduction?
3. What are the income qualifications for student loan interest deduction?
4. What’s the total amount of student loan interest I can deduct?
5. Do I need to itemize to get the student loan interest deduction?
6. How do you calculate student loan interest deductions?
Officially known as the Student Loan Interest Statement, Form 1098-E is a tax form that all of your student loan lenders must send you if you paid $600 or more of interest during the tax year. The form lists all the interest included in your loan payments through the full tax year. This form helps eligible borrowers to claim a partial or full deduction on that interest paid when filing taxes. You’ll do this by inputting the allowable amount into your main tax form, the 1040.
Keep in mind that just because you receive a 1098-E does not mean you automatically qualify for the deduction.
The first step to understanding if you might qualify for an interest deduction is to check out this list of qualifications from the IRS. You must meet all of them, not just one or two, in order to potentially qualify. Note that qualified loans include both federal and private loans used to pay educational expenses for yourself, a dependent or a spouse.
One thing that’s important to note is only the person who is legally obligated to repay the loan can claim the deduction. So if Mom or Dad made payments for you, but your loans are in your name, only you can take the deduction. However, if they claim you as a dependent, you won’t be able to receive a tax break, even if the loan is in your name.
- 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 (more on that below).
- You or your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return.
To qualify for the full interest deduction on your taxes for the 2019 tax year, your MAGI must be less than $70,000 as a single filer ($140,000 for couples filing jointly). For incomes above $70,000, the amount you can deduct will be phased out, which means you can still deduct interest, but at a lesser amount. Once your MAGI is $85,000 as a single filer, or $170,000 for couples filing jointly, you are no longer eligible to deduct student loan interest on your taxes.
|Your filing status||Phaseout of deduction starts with a MAGI of:||Not eligible for a student loan interest deduction if you have a MAGI of:|
|Single, head of household, qualifying widow(er)||$70,000||$85,000|
|Married filing jointly||$140,000||$170,000|
|Married filing separately||Not eligible||Not eligible|
If you are eligible for the student loan interest deduction, the interest paid is deductible for the lesser of $2,500 or the interest you actually paid during the tax year for which you’re filing.
No. Because the interest deduction is simply an adjustment of your modified gross income, or an “above the line” deduction, there’s no need to itemize it on your taxes.
Although you can claim up to $2,500 as a student loan deduction, the actual amount saved on your taxes won’t be that much. The deduction is calculated based on the amount of interest you paid over the past year, as well as your income and tax bracket. The maximum amount it can lower your tax bill by is $550 annually, as the benefit phases out in the 22% tax bracket. Filers with higher incomes (MAGI above $50,000) tend to benefit the most from the deduction.
You can use our student loan interest deduction calculator to calculate the tax savings you may see from student loan interest deduction, based on your unique situation. As an example — if you are a single filer with a MAGI of $60,000 who paid $2,000 in student loan interest in 2019, you might expect a refund increase of $500, per our calculator, as long as you meet all the other qualifications for deducting student loan interest.
There are two boxes on the 1098-E form you’ll use to fill out your tax return: Box 1 and Box 2.
Box 1 is your student loan interest summary; it’s the total dollar amount you paid in interest during the tax year. (Remember: Box 1 only lists interest paid, not your total loan payments.)
Box 1 may also list any loan origination fees or capitalized interest, if you took out your loan on Sept. 1, 2004 or later.
For any loans opened before Sept. 1, 2004, you may qualify to deduct those origination fees or capitalized interest. Those won’t be reported in Box 1, but you’ll see a check mark in Box 2. Otherwise, it’ll likely be empty.
You can go here to see an example of Form 1098-E.
Once you receive the form, it’s up to you to include this information when you file your taxes.
Here are some additional cases that may apply to you:
1. You should still be able to deduct student loan interest if you refinance
2. You must still include student loan help from an employer for 2019
3. You may be eligible for education tax credits
4. You may have to pay taxes if you get student loan forgiveness
If you choose to refinance your student loans, your student loan interest is likely still eligible for tax deductions. However, if you refinance for more than the original value of your student loans, and use the additional amount for any other purpose aside from qualified educational expenses, you won’t be able to deduct any interest paid on the loan.
The CARES Act, a U.S. government response to the COVID-19 pandemic, allows employers to make tax-free student loan payments of up to $5,250 per employee, for the remainder of 2020. This may help when you file your 2020 taxes, if you have an employer who participates in this program. For your 2019 taxes filed in 2020, if you received student loan payback assistance from an employer, it’s possible that money will be considered taxable income.
If you are still enrolled in school, you may be able to qualify for an education tax credit, which is different from a student loan tax deduction. With a tax credit, you can lower your tax bill by the exact amount for which you qualify. A key educational tax credit available is the American Opportunity Tax Credit, which allows you to potentially lower the amount you owe in taxes by up to $2,500, depending on your eligible education expenses over the tax year. You also may also qualify for the Lifetime Learning Credit, which you can claim for up to $2,000 in tuition and fees spent. You may qualify for one or the other, but not both at the same time.
Participating in an income-driven student loan-forgiveness program can be a serious way to save. However, you should be aware that you may owe a hefty tax bill once the loan is forgiven. This is because that forgiven debt may be considered income by the IRS. Talk to your accountant about how to best manage this and other issues so you don’t end up with a nasty unexpected tax surprise.
Understanding the student loan-related tax breaks for which you may be eligible can save you a lot of cash at the end of tax season. Consider the information above and work with a tax professional to figure out your eligibility and how to maximize these potential benefits.
If you’re lucky enough to get a refund from the IRS this year, consider putting some or all of it toward extra student loan payments. That way, you can pay off your loans faster and put future savings toward your major life goals. Here’s our guide to accelerating student loan repayment with your tax refund.
Rebecca Stropoli contributed to this report