Let’s be honest: Does anyone actually look forward to doing taxes? The whole process feels like an overly complex homework assignment from a fuddy-duddy teacher.
But the next time you find yourself frantically searching for your W-2 form or trying to figure out where you put the shoebox with your receipts, think about the money you might get back from your deductions.
If you paid on student loans in the prior tax year, you might just qualify for the student loan tax deduction, which allows borrowers to deduct up to $2,500 in interest they paid from their taxable income.
Getting a refund? Whether you’re considering putting it toward skydiving for the first time or you’re planning to use it to pay off more student loan debt, here are some things you should know about the student loan interest deduction and whether you qualify.
How the Student Loan Tax Deduction Works
The student loan tax deduction isn’t a magical discount that’s taken off your monthly student loan payment like a coupon at the grocery store checkout. Instead, you pay the interest out of pocket throughout the tax year and claim the interest you paid when you do your taxes.
The interest applies to qualified student loans that were used for tuition and fees; room and board; coursework-related fees, books, supplies, and equipment; and other necessary expenses like transportation.
If you qualify for the full deduction, you can reduce your taxable income by up to $2,500, as long as you actually paid that much in interest. (You don’t need to itemize in order to get the deduction.)
Not only do required interest payments count, but if you made any additional interest payments toward your student loans in the past tax year, those count too.
Look for Form 1098-E
Unfortunately, you can’t deduct the entirety of your student loan payments from your taxes. Instead, you can only deduct your interest.
To throw another curveball into the mix, the way the IRS calculates your interest and principal payments could be different than what your loan servicer reports. Your loan provider reports this information on Form 1098-E, which is a tax form financial institutions should send to borrowers when the tax year ends.
The only reason you wouldn’t get one is if you paid less than $600 in interest on their loan. But these forms don’t always report things like the interest you paid on certain origination fees or capitalized interest, which also qualifies for the student loan deduction.
How to Calculate the Student Loan Tax Deduction
To calculate the full value of the interest deduction, start with the amount of interest the form says you paid, and then add any interest you paid on qualified origination fees and capitalized interest. Just make sure these amounts don’t add up to more than the total you paid on your student loan principal.
Clear as mud, right? Hey, no one said the IRS makes things easy! Here are some examples of how to deduct these amounts.
Deducting the origination fee: As of Sept. 1, 2004, this fee—usually a one-time fee that lenders charge for creating a new loan—is included on your 1098-E. For loans issued before that date, you can use any reasonable method to allocate the loan origination fees over the term of the loan. One way to do this is to figure out how much the fees will cost you monthly over the life of the loan.
Example: If the origination fee you were charged on your loan was $1,000 and the term length was 10 years, or 120 months, that would mean your origination fee would be $8.33 per month, or $100 per year.
Deducting capitalized interest: If your Form 1098-E says your loan has capitalized interest, you can also claim that after you’ve claimed an origination fee deduction. Capitalized interest accrues and then is added to the loan principal if you don’t pay it. Unsubsidized federal loans, for example, accrue interest while the student is in school and during the loan’s grace period. It’s common for that interest to be capitalized (added to principal) at the end of the grace period.
Example: If you made $6,000 in student loan payments, of which $1,000 went to interest and $5,000 to principal, you can claim the $100 you paid toward your origination fee and the full $1,000 in capitalized interest. But if you only paid off $750 of your principal, you can claim $650 of the $1,000 of capitalized interest, because you’ll have to claim the $100 in origination fees first and you can’t exceed the amount you paid toward your principal.
How to Qualify for the Student Loan Tax Deduction
Before you pick out the color of your sky-diving parachute or decide which loan you’ll put your refund toward, it’s important to figure out if you qualify for the deduction.
To cash in on this deduction, all of the following must apply:
• You paid interest on a qualified student loan (a loan for you, your spouse, or a dependent) during the tax year.
• Your modified adjusted gross income (gross income for the year minus certain deductions) is less than a specified amount that is set annually.
• Your filing status isn’t married filing separately.
• Neither you nor your spouse can be claimed as a dependent on someone else’s return.
The loans in question can be federal or private student loans.
What About Income Requirements?
Your modified adjusted gross income is calculated on your federal tax return before any student loan interest deduction is made. The eligible ranges are recalculated annually.
For tax year 2020 (filing in 2021), the student loan interest deduction was worth as much as $2,500 for a single filer, head of household, or qualifying widow/widower with a MAGI of under $70,000.
For those three kinds of filers who exceeded a MAGI of $70,000, the deduction began to phase out, meaning the most they could deduct was less than $2,500. Once their MAGI reached $85,000, they were no longer able to claim the deduction.
For married couples filing jointly, the phaseout began after a MAGI of $140,000, and eligibility ended at $170,000.
Confused by all these requirements? If so, consider going to a tax professional to help with your return to make sure you can take advantage of the deduction. That way you can enjoy the tax benefit without having to spend hours combing through the IRS’s website for answers.
Who doesn’t love a tax deduction? Qualified filers can take a student loan interest deduction of up to $2,500 atop the standard deduction. Most private and federal student loans are fair game.
If you’re on the hunt for an education loan—undergrad, graduate, or parent loan—SoFi offers private loans with flexible repayment options, competitive rates, and no fees.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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