Paying your student loans can help with your taxes! More specifically, paying off the student loan interest can potentially lower your tax bill.
Paying off the interest accrued on your loan can be claimed as a deduction towards your adjusted gross income (AGI). Your AGI determines how much of your income will be considered taxable. As a result, it ultimately affects your tax bill to the IRS. You can claim up to $2,500 in student loan interest that you paid in a year as a deduction towards your AGI. Of course, there are some considerations before claiming the student loan interest deduction on your individual income tax.
- Qualified student loan – The loan that you will claim the interest deduction on must be a qualified student loan. It has to be a loan taken out by you, a spouse, or your dependent towards educational purposes paid within a reasonable period after you took the loan. Loans taken from relatives or employer plans do not qualify.
- Qualified Educational Expense – The expenses used by the loan have to be qualified education expenses. Registration fees, books, and lab materials are generally considered qualified expenses. Transportation costs such as parking fees also qualify. Even room and board expenses MAY qualify if the residence is a property owned and operated by the educational institution, such as an on-campus dormitory.
- Eligible Education Institution – Generally any accredited university or vocational school that is able to receive federal student aid money.
To help calculate your student loan interest deduction, organizations that maintain student loans like banks or
quasi-government entities, such as MOHELA, send out IRS Form 1098-E within the early part of the year if they receive student loan payments of at least $600 from the previous year. The 1098-E notes the amount of interest accrued, which determines the deduction amount. The deduction begins to phase out if your AGI is at least $50,000 up to $80,000 if filing single. For those married filing jointly, the phaseout begins at $130,000 up to $160,000.
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