Student Loan Interest Deduction Taxes
The student loan interest deduction is a nice tax break, but there are limits that you need to consider. Having the right information can help you maximize your tax savings every year.
How Much Can You Deduct?
You can only deduct the interest paid on your student loans, as well as your spouse’s and dependent’s student loans. You may also be able to deduct interest paid on a home equity loan or credit line used to pay for higher education expenses if that loan is considered qualified education debt.
If you’re married and file a joint return, you can deduct as much as $2,500 in combined qualified education expenses when figuring out how much you can deduct from your total taxable income. If you’re married but file separate returns, each spouse is only entitled to an individual deduction of up to $1,000.
What Are the Income Limits for Student Loan Interest Deduction Taxes?
The amount you can deduct for student loan interest may depend on your filing status and income.
- If you are married and file a joint return, you can claim up to $2,500 of student loan interest per year.
- If you are married but separate during the tax year (even if only separated for one day), your spouse’s income is included in determining whether or not to claim the deduction. Therefore, if one spouse claims the deduction and the other does not, it could be beneficial for both spouses to claim their share of the deduction so as not to give up any portion of what would otherwise have been available for each person.
- If you are single or head of household: You may deduct up to $1,000 of student loan interest on Form 1040A; no part of this amount carries over from previous years’ returns; however, if all or part comes from an employer plan like an ESPP/ESOP then there is no cap on how much can be deducted even though at first glance it looks like there might be one because it says above “up to” instead of saying “$1k.” That said…it appears that federal law prohibits employers from borrowing money through these plans which means they’re really more like traditional 401(k)s than anything else (you put money into them with after-tax dollars–not pre-tax).
Does it Matter Who Pays the Loan?
The IRS doesn’t care who pays the loan. So, you can take advantage of this deduction no matter who is paying. That’s a big deal, because there are many reasons why one parent would be paying for a student loan instead of the other (like if mom had already used up her $2,500 tax credit and dad wanted to help out his kid).
The only thing that matters is how much money you paid toward your student loan interest in a given year. If it was more than $600 and you’re eligible for an American Opportunity or Lifetime Learning Credit as well as an education tax deduction, then you’re golden!
What if I’m Married and We File Taxes Separately?
If you and your spouse file separate returns, you can still deduct the interest paid on your student loan if your spouse does not claim the deduction on his or her return.
If you file jointly with a non-filing spouse, you must both qualify for the deduction or neither of you will be able to claim it. You may be able to increase your overall tax refund by filing a joint return even if only one of you was required to file (such as for dependents).
What Loans Qualify for Student Loan Interest Deduction Tax Savings?
The student loan interest deduction is available for taxpayers who have paid interest on student loans. Unfortunately, this does not include the following:
- Federal student loans
- Private student loans
- State and municipal government-issued student loans
You may qualify for the deduction if you are a taxpayer and meet the following conditions:
- You paid interest on a qualified student loan in order to be able to attend college, trade school or vocational school; and
- Your AGI was less than $80,000 if filing as a single person or $160,000 if married filing jointly at least one of whom was required to borrow money to pay for higher education expenses. The IRS also allows you to deduct up to $2,500 in interest payments if your modified adjusted gross income is greater than $65,000 but less than $80,000 ($130,000).
Which Loans Don’t Qualify?
- You can’t deduct student loan interest on private student loans.
- If you’re using your student loans to pay tuition and fees, you can’t deduct the interest.
- If you’re using your student loans to pay room and board, you can’t deduct the interest.
There are student loan interest deductions
If you have a student loan, you have the opportunity to deduct interest paid on those loans. This is true whether your loans are federal or private, and whether they were taken out for your undergraduate studies or graduate studies.
The deduction is available to anyone who has made student loan payments during the tax year and whose modified adjusted gross income (MAGI) falls below certain thresholds (see below). If both spouses in a married couple file a joint return, they can claim their respective student loan interest deductions even if only one spouse had any eligible student loans during the year—as long as they file jointly.
The student loan interest deduction is an important part of your taxes. It allows you to reduce the amount of income that you have to pay taxes on, which means less money for the government and more money in your pocket. However, there are some limitations as well as situations where this deduction may not apply at all. To know if this deduction could help save you money on your 2017 income tax return, talk with a professional tax preparer like one from TaxRebateStores.com.