When you have student loans, you probably need every little bit more money you can get. Did you know that your student loans could potentially generate some cash for you?
In certain circumstances, you may be able to save on your tax bill by subtracting the interest you pay on your student loan. The total deduction from your taxable income can be up to $ 2,500. As a final bonus, you don’t have to list to receive this deduction.
In order to be eligible for the deduction, your loan must meet certain requirements. It must have been made to cover the costs of skilled education as defined in IRS Publication 970, including tuition, fees, and most room and board costs. The loan cannot be from a relative or through a qualified employer plan and the cost of education for a qualified educational institution must be borne by you, your spouse, or loved one. (There are several extensions to who will be considered dependent for the purposes of this deduction.) You are not eligible if you are eligible for being dependent on someone else’s return.
The student in question must be at least half-enrolled as determined by the educational institution, but the half-term designation must meet certain federal standards. For more information on collective entitlement requirements, see publication 970.
Student loan interest deduction is based on your modified adjusted gross income (MAGI), the adjusted gross income from your tax form with various deductions based on the tax form you submitted. Eligibility starts at $ 70,000 for individual taxpayers and $ 140,000 for those who are married and file together. Beyond a MAGI of $ 85,000 for a single taxpayer or $ 170,000 for joint marriage registration, you will not be able to claim the interest deduction on student loans at all. (If your status is a separated marriage, you will not be able to claim this deduction on any income tier.)
If part of your education costs are being paid from various tax-exempt sources, adjustments will need to be made to the amount of allowance that you can claim. Examples of where adjustments are required include employer-provided assistance, tax-free distributions from a qualifying degree program or Coverdell education account, and interest on US savings bonds. You cannot deduct an amount that can be deducted under other categories of tax law (e.g. mortgage interest).
On the positive side, some other costs can be factored into the deduction along with simple interest on the student loan. A loan origination fee qualifies if it is used on the use of money in lieu of real estate or services (e.g., processing costs) provided by the lender. Unpaid interest added to the principal (also known as capitalized interest) is deductible as is interest on refinanced student loans within certain parameters. You can also deduct interest on additional or voluntary payments you make.
As long as you have paid at least $ 600 in interest on a student loan, the lender holding your student loan will provide you with a Form 1098-E. However, you can still deduct your qualifying student loan interest if it is less than $ 600 – it just gets a little harder to calculate. Publication 970 has a rather complex example of calculating your deductible interest.
If you and your student loan are qualified, make sure to take advantage of the student loan interest deduction when tax time expires. Turn a negative into a positive by using your student loan debt to your advantage.
Due to the COVID-19 pandemic, the IRS and the Treasury Department have extended the 2021 tax filing deadline from April 15 to May 17. In the interests of safety and to contain the spread of the coronavirus, all Taxpayer Assistance Centers (TAC) have been temporarily closed and personal IRS services are only offered by appointment. Taxpayers can call 844-545-5640 to make an appointment or find their local IRS TAC on the IRS website. Please visit the IRS Coronavirus Tax Relief page for the latest updates.
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