There are some amendments that eliminated tax cuts for Americans. But luckily these amendments did not reach the student loan interest deduction. Imagine if you can deduct $2,500 from your income and exempt them from tax.
If you are taxed according to the 22% tax bracket, you will be able to save up to $550 and get them back to your pocket. This interest deduction is applied according to the law that regulates the interest paid on student loans.
For this reason, a lot of Americans prefer to use student loans to reduce the burden of tax payments. But these deducted $2,500 are only deducted once if you are single or married and file a joint return.
This mean that if you and your spouse have separate student loan debts, both of you will be allowed to deduct only $2,500 from your taxable income.
What is the student loan interest deduction?
When you have a student loan, you will be required to repay the original amount of the loan in addition to the interest amounts.
Student loan interest deduction will enable you to exclude your paid interest amounts from your taxable income.
in 2019,if your annual income is $70,000, you will be allowed to exclude all the paid amounts of loan interest.
But if your annual income is from $70,000 to $85,000, you will be allowed to exclude less amounts of your paid loan interest.
The same rule is applied if you are married and file a joint return but if your income is from $140,000 and $170,000.
Qualified persons are enabled to take the student loan interest deduction if they take the loan by themselves. If their parent take out the loan for them, he/she will benefit from the student loan interest deduction.
But if the loan is in your name, you are considered anindependent person and that don’t allow your parents to take the interest deduction instead of you.
Luckily you can benefit from the student loan interest deduction regardless you are a graduate or a student. But you need to differentiate between a normal loan and a qualified student loan that allows you to have interest deduction.
What is a qualified of Student Loan Interest Deduction?
Not every loan could be considered a student loan. For a loan to qualify as a student loan, it should follow the following requirements:
– It should be taken for the purpose of paying your educational expenses, your spouse’s educational expenses or your parent’s expenses on your education when they list you as a dependent.
– It should cover the educational expenses for a reasonable period. For example, the student loan should cover expense before the beginning of your educational period for 90 days and after the beginning of your educational period for 90 days.
So, you can’t claim that your obtained student loan is assumed to cover your educational expenses for three years. It is not a reasonable period.
There is no specified criteria to have an official student loan.
If your personal loan is used for your educational expenses, so it is qualified to be a student loan and if you used your credit card to pay for educational expense,
it could be perceived like the student loan which means that the interest you pay on your credit card will be deductible from your taxable income.
What if you are a dependent?
If your parents listed you as a dependent, you will not be able to list yourself on your return. This will deprive you from benefiting from the student loan interest deduction. Your parents can list you as a dependent according to the following conditions:
– If you are disabled either totally or permanently.
– When you are still younger than 19 years old and half of your financial requirements is based on your parents support.
– If you are younger than 24 years old and you are still a full time student.
Regardless you are a dependent or not, you will be required to file a tax return to claim the benefits of the student loan interest deduction. But how and when?
How and when to file a tax return?
You can file a tax return any time before its deadline.
Now it is easy for students and graduates to file a tax return by using the online tax software.
But to accurately file your tax, you will need to get three forms:
– W-2 Form : this is a tax statement that is provided by your employer
– 1098-T Form : if you are still a student, you can get this statement from your school
– 1098-E Form : this statement is received on your email once your paid interest amounts on your student loan exceed $600.
When your paid interest amounts are less than $600,
you will be required to ask the student loan servicer for that statement.
Filing a tax return is not a choice, you should do it otherwise you will have to pay a penalty. This penalty is measured as an extra 25% of your taxes.
You will have also to forget your expected tax refund that is based on the student loan interest reduction. You may also be required to show evidence such as documents related to your educational expenses.
Other tax deductions for educational expenses
The governments encourages students and tries to provide a lot of educational tax breaks. Student loan interest deduction is not the only thing that is provided by the government.
The American opportunity credit is another tax deduction for educational expenses. It could reach $2,500. Another tax deduction is the lifetime learning credit. It could reach $2,000.
Each tax deduction opportunity has its benefits, your type of income is the base by which you can determine which opportunity is the best to save you more money.
Before asking for a loan for your educational expenses, make sure to compare between the rates that are provided by different lenders until you reach the best one.
Top lenders include the following:
– Education loan finance
– Laurel road