Student Loans Interest Tax Deduction
The Student Loans Interest Tax Deduction is a tax deduction that allows taxpayers to deduct up to $2,500 of student loan interest each year. The Student Loans Interest Tax Deduction was enacted in 2007 as part of the College Cost Reduction Act, which was signed by President Bush and made permanent by President Obama. The deduction can be applied to any federal or private student loan that you may have taken out for yourself or your spouse.
What is the Student Loans Interest Tax Deduction?
A tax deduction is an amount that you subtract from your income before calculating taxes. That’s different from a tax credit, which is a dollar-for-dollar reduction in the amount of tax owed. A tax deduction reduces the amount of income subject to tax, while a credit reduces your total tax bill.
Here’s an example: Say you make $50,000 per year and are in the 25% marginal tax bracket (an average person making approximately $50K would fall into this category). If you receive a $2,500 deduction on your W-2 form, it will reduce your taxable income by this figure—meaning it doesn’t reduce how much total money you have to pay (as with credits), but rather just lowers how much money is taxed by the IRS itself.
Factors that Affect Student Loans Interest Tax Deduction
The student loan interest deduction is only available to people who have a student loan and are paying interest on it. If you do not meet these requirements, your tax return will be automatically rejected at the beginning of filing season. If you do meet the requirements but did not submit proof of repayment with your tax return, then we will notify you that we need proof before processing your refund or issuing any kind of balance due notice.
Know how your taxes are affected by student loan interest.
Student loan interest is one of the most common deductions on tax returns. If you’re paying interest on student loans, whether or not you can deduct it depends on your filing status and income.
The IRS allows taxpayers to deduct up to $2,500 in student loan interest payments per year if they meet certain criteria. You may be able to deduct this amount even if it brings your taxable income below zero.
You can only claim this deduction if all of these conditions apply:
- Your filing status is single or married filing jointly (MFJ)
- You paid more than $600 in qualified education expenses during the year for yourself, spouse, or dependent(s)
- Your modified adjusted gross income (MAGI) is less than $80,000 if you’re single or $160,000 if MFJ (MAGI includes unearned income such as distributions from 529 plans; see question 8 below).
The student loan interest tax deduction is an important part of your financial life. As a student, you may be eligible to claim up to $2,500 in interest on your federal taxes. When it comes time to pay off your loans, this tax break helps reduce the amount you owe and can make paying off debt more manageable.