How Student Loans Could Impact Your Taxes
With Tax Day (April 18th this year) just around the corner, it’s time to get serious about your taxes. If you paid tuition or student loan interest in the previous tax year, you may qualify for a student loan interest deduction or education tax credit—which could mean a lower tax bill or a higher tax refund. Here’s a simple breakdown of the tax credits and deductions you might be eligible for.
Student Loan Interest Deduction Explained
By now you should have received 1098-E forms from each of your student loan providers that show the amount of interest you paid over the last calendar year. If you did not receive this by mail, your provider likely sent an email notification to let you know your 1098-E is ready to download.
To qualify for the maximum $2,500 student loan interest deduction, you must meet certain filing and income criteria. You can deduct student loan interest on loans issued for yourself, your spouse (if you file jointly), and your dependents—but not if you are claimed as a dependent by someone else. Best of all – since this is an adjustment to your gross income, you can take this deduction even if you don’t itemise. Get more details about eligibility with our in depth look at student loan interest deductions.
If your filing status is single and your modified adjusted gross income is under $65,000 ($130,000 for married filers), you should be eligible for the full benefit. The benefit is phased out if you make between $65,000 and $80,000 ($130,000 and $160,000 for married people). If you are single and make over $80,000 or married and make over $160,000 you can’t deduct the interest. If your income is over these limits, and you have a mortgage, you might be able to combine both loans with a SoFi Mortgage that also refinances your student loans. Mortgage interest is fully deductible for most people.
Am I Eligible for Education Tax Credits?
If you paid tuition, fees or other education-related expenses in 2016, you may be eligible for an education tax credit, including the American Opportunity Credit and the Lifetime Learning Credit. Note that you can’t claim both credits for the same individual within the same year. If you qualify for both, calculate them both and pick the one that’s best for you.
American Opportunity Credit – 100% of the first $2,000 of eligible education expenses and 25% of the next $2,000. Students enrolled at least half-time in a degree or certificate program for one academic period during the tax year may be eligible to receive a credit of up to $2,500 for the cost of tuition, fees and course materials. You can only claim the credit for up to four years, and you can’t claim it after you’ve completed the first four years of post-secondary education (so, no grad students).
The income limit is $90,000 for individual filers and $180,000 for joint filers. Your credit will be reduced if you make between $80,000 and $90,000 for individual filers and between $160,000 and $180,000 for joint filers. However, if the credit takes your tax bill to zero, you can get 40% of the unused credit, up to $1,000, as a tax refund. Here are the complete rules.
Lifetime Learning Credit – 20% of the first $10,000 of eligible education expenses. Similar to the American Opportunity Credit, but with a lower income limit ($65,000 for individuals, $131,000 for couples), lower maximum credit amount ($2,000 vs. $2,500), and looser standards around the type of education received (doesn’t have to be degree or certificate-based). But, there’s no limit to how many years you can claim the credit. Your credit will be reduced if your income is between $55,000 and $65,000 ($110,000 and $130,000 for married filers).
If you want to learn more about these education tax credits and additional education tax deductions, 20SomethingFinance offers a comprehensive breakdown of the opportunities and eligibility. “The good news is that if you’re paying for school (for yourself or others),” writes G.E. Miller, “there are many education tax credits and deductions available to you.”
Don’t leave money on the table this tax season—find out if you qualify for a student loan interest deduction or education tax credit, and make sure you get the most out of your tax return.
SoFi Lending Corp. is not a tax advisor. All decisions regarding the tax implications should be made in consultation with your independent tax advisor. By refinancing your home to pay off a federal student loan you will lose your federal benefits such as income based repayment, deferment, forbearance, forgiveness, loan disability discharges, or income contingent repayment. If you refinance your home to pay off a private SoFi loan you may also lose certain benefits such as unemployment protection. In either case, your unsecured student loan debt will be replaced with debt secured against your residence. More detailed information is available here.