When you’re taking out your student loans, it’s a good idea to think about how this will affect your long-term financial situation. Keep in mind that the loans will need to be paid back and the repayment period could last for up to 30 years. There are many benefits and programs available to people who are making student loan payments, and it can be difficult to keep track of them all. One of these benefits is the student loan interest deduction. The Taxpayer Relief Act of 1997 allows you to deduct interest paid on student loans within certain parameters.
Unfortunately you cannot deduct your entire payment, but you may be able to deduct up to $2500 of the interest you pay each year to lower your taxable income. In order to claim this deduction, your Modified Adjusted Gross Income (MAGI) must be less than $80,000 (or $160,000 if married filing jointly.) If you earned less than $60,000, you can take the full deduction, and if your income is $60,000-$80,000, you can take a prorated amount. Your student loan servicer will give you the 1098-E form annually, which will tell you how much interest you paid that year.
This is not an automatic deduction; you’ll need to meet certain requirements. Your payments must be on private or federal loans that were taken out to cover qualified educational expenses. There are caps on the amounts that qualify as “educational expenses” such as allowed tuition and housing amounts. If you can prove that you used your credit card to pay for educational expenses, you may be able to deduct the interest you pay. Only the person who borrowed the money may use this deduction. For example, if you borrowed the money and your parents are making the payments, you are entitled to the deduction, even though you didn’t make the payments.
If you’re married, you’ll need to choose how you file your taxes wisely, especially if you both have student loans you’d like to deduct. If you’re married and filing jointly, you may use this deduction up to the $2,500 (or prorated amount, if applicable.) If you’re married and choose to file separately, neither of you can use this deduction. However, you may be able to take advantage of payment plans such as PAYE and IBR to save money by lowering your monthly payments. In this situation, you’ll need to decide what’s most important to you: low monthly payments or getting the debt paid off quickly with a tax break.
Work With Professionals
Anytime you’re dealing with taxes, especially when you’re taking advantage of deductions, you’ll want to work with an experienced tax professional. Tax regulations and deduction amounts are subject to change, and you don’t want to make any mistakes that could end up costing you money. I can also assess your overall situation and help you make important decisions about which payment plan to use and how to deduct your student loan interest. If you’re making student loan payments, give me a call so that I can ensure you’re on the right plan for you.