Higher-education costs have been on the rise for two decades, but fortunately, you can get some of that money back at tax time.
Based on factors such as your filing status and household income, you may qualify for certain tax deductions and credits if you paid interest on a qualified student loan. Deductions reduce the amount of your taxable income, while credits directly lower your tax bill – and some even provide a refund.
Here are answers to some of your biggest questions about student loans and education-related tax breaks.
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Is Student Loan Interest Tax Deductible?
The deduction is “above the line,” which means you can take it without itemizing, and it will reduce your taxable income. You can either itemize deductions or take the standard deduction on your federal income tax return.
However, you won’t be able to deduct the principal part of your student loan payments.
A common misconception is that the entire loan payment is deductible, says Tatiana Tsoir, a certified public accountant. “Only the interest portion is.”
How Deducting Student Loan Interest Works
You can deduct either $2,500 in student loan interest or the amount you paid during the year, whichever is less. To claim the deduction, you must meet a few eligibility requirements:
- The loan is for yourself, your spouse or your dependent. The student loans can be federal or private, as long as they’re in your name or your spouse’s name. The deduction also applies if you took out a student loan, such as the Parent Direct PLUS Loan, to pay for your child’s education.
- You spent the money on school costs. The loan must be used for qualified higher-education expenses, such as tuition, fees and other related costs. Room and board; transportation; insurance; and other similar personal, living or family expenses are not eligible. Additionally, “The loan must be taken out and used within 90 days prior to the start of the academic period or 90 days after it ends,” says Holley G. Cary, certified financial planner, vice president, and senior financial planner at First Horizon Advisors.
- You’re legally obligated to repay the loan. That generally means the loan is in your name or your spouse’s name. “You cannot claim the deduction if the child takes the loan out in their own name,” Cary says, and is the borrower – “even if you make the payments on their behalf.”
Is There an Income Limit for the Student Loan Interest Deduction?
Yes, the value of the student loan interest deduction is partly based on your modified adjusted gross income, or MAGI, and filing status.
- Dependent or married filing separately. You won’t be able to claim the student loan interest deduction if you file separately from your spouse or you can be claimed as a dependent on someone else’s tax return.
- Single, head of household or qualifying widow or widower. For the 2022 tax year, you can claim the maximum deduction if your MAGI is $70,000 or less. The deduction starts to decrease if your MAGI falls between $70,000 and $85,000.
- Married filing jointly. The full deduction is available if your family’s MAGI is $145,000 or less, and it phases out if your MAGI falls between $145,000 and $175,000. However, you may be able to find ways to lower your income below the threshold and claim the tax deduction, says Matthew Mancini, a CFP and senior wealth planner at Wilmington Trust. For instance, you can reduce your taxable income by contributing to eligible retirement plans, health savings accounts, dependent care reimbursement accounts and flexible spending accounts, Mancini says. You can calculate the potential value of your student loan interest deduction with IRS Publication 970.
What Form Do You Need for Deducting Student Loan Interest?
You’ll need the information on Form 1098-E to deduct student loan interest on your taxes.
If you paid at least $600 in student loan interest during the tax year, you will receive at least one Form 1098-E in the mail by late January. Loan servicers use this form to report interest payments to the IRS and you. Use box 1 on the form to claim the deduction on your tax return.
If you don’t receive Form 1098-E by late January, you can still claim the deduction. You’ll just need to call your loan servicer, look over your statements or log in to your online account to find the amount of interest you paid.
What Other Education Tax Breaks Can You Claim?
Several other tax advantages are related to paying or saving for an education:
American Opportunity Tax Credit. This credit is available if you paid for qualified higher-education expenses, such as tuition costs, fees, books and supplies, for a student enrolled at a postsecondary institution. You can claim the AOTC even if you paid for the expenses with student loans.
The credit is worth up to $2,500 annually per eligible student for the first four years of the student’s higher education, and you’ll receive a percentage of what you spent. The credit is 100% of the first $2,000 of qualified education expenses for each eligible student plus 25% of the next $2,000 you spent for that student. If the credit lowers your tax bill to zero, you can have up to 40% of any remaining amount up to $1,000.
Lifetime Learning Credit. The Lifetime Learning Credit is worth 20% of the first $10,000 you pay toward qualified education expenses, or a maximum of $2,000 per tax year.
It’s more flexible than the AOTC because that credit only applies to expenses for undergraduates who are attending school at least half time, says Jerry Inglet, a family legacy advisor at Wilmington Trust. “The Lifetime Learning Credit can span over a longer educational timetable,” says Inglet, with fewer restrictions.
Adds Cary: Note that you can claim both tax credits on the same return, but you cannot claim them for the same student and the same expenses. If you’re paying college expenses for two dependents simultaneously, you may decide to claim the AOTC for one and the LLC for the other.
Coverdell Education Savings Account. If your MAGI is less than $110,000 or $220,000 if filing jointly, you may use this type of account to save up to $2,000 a year toward a student’s qualified education expenses. “While there is no tax break on contributions, the tax break for the Coverdell ESA happens at withdrawal,” Cary says. The beneficiary can use tax-free distributions for college, career school or K-12 expenses.
529 plans. A qualified tuition program, also known as a 529 savings plan, is an investment account you can set up to help cover a loved one’s future education costs. Beneficiaries are typically relatives.
Earnings grow free from federal taxes, and withdrawals also won’t be taxed when the money is used to pay for qualified education expenses.
A 529 account is generally more accessible than a Coverdell because: “There are no age restrictions or contribution limits, with the exception of certain lump-sum or gifting caveats,” Cary says.
If the beneficiary decides not to attend school, you can use the funds for other expenses, though you’ll likely pay federal income taxes and a penalty on the withdrawal. You can also change the beneficiary, Cary says, or withdraw up to $10,000 from a 529 plan with no tax implications to repay student loans. And starting in 2024, you may roll unused 529 funds into a Roth individual retirement account without incurring a tax penalty.
IRA distribution. You can take money from your IRA to pay for education costs without a 10% early withdrawal penalty. You’ll need to use it for qualified education expenses, such as tuition costs, fees, books, and equipment and supplies, for yourself, your spouse, your child or your grandchild.
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