Student loans and tax deductions: benefits and restrictions

August 23, 2017

If you borrowed funds to finance the individual or children’s education, bad news — you cannot apply for a tax return regarding the principal of the credit. However, in many cases you have the opportunity to write off a piece of banking interest. It can be deductible only if the loan was taken out by the student him or herself, dependents or a spouse.

Student loans are separated on federal (when you borrow from the government) and private. Both of them fit for the deduction. If you consider refinancing your student loan, in most cases you will be able to get your tax return as well. But it will be wise to check this in advance.

The overall sum of student loan interest tax deduction can not exceed $2,500 per annum (limitation set for 2016 -2017 tax years). No itemising is required to claim for this type of tax return. But you need to meet several requirements to apply for this option.

First of all, your income level must be below a certain amount which is annually adjusted. Today this boundary is set at $80,000 worth of personal mоdified adjustеd gross incоme (МAGI), according to the data of the Internal Revenue Service. The boundary for married borrowers who apply together amounts to $160,000. When your annual income exceeds those ceilings the deduction becomes impossible.

Secondly, your loan must be “qualified”. It means that if you want to apply for interest tax return in the future, the borrowed money must be spent on education, which has a “qualified” status. To be considered as “qualified”, your education institution must participate in a financial aid program administered by the U.S. Dеpartment of Educаtion. Student credits may cover not only education fees and tuition, but also expenditures such as books, accommodation, or even transportation.

Thirdly, the 12 months of interest payments should coincide with the tax period that your application covers. In cases when your monthly interest payment is at least $600 (apart from the principal loan) you should order a student loan tax form 1098-E from your bank to put it into tax form 1040. This paper will show, how much interest you repaid during tax year.

The solo person who can apply for tax deduction on student loans is the direct borrower. If your friend, spouse or parents made some payments instead of you, they are no longer considered as tax deductible. Today, we have plenty of options to get money help online and make the process of tax application easier with special services such as, for example, TurboTax or TaxACT.

Your individual student credit scheme is unconventional and you have doubts? It makes sense to ask for professional tax advice to check what options you have. Maybe you would even learn that your case qualifies for the federal debt forgiveness program and you won’t have to repay it for years to come. The government has the right to make exceptions and forgive student loans partially or fully if the reasons are convincing. If not, consider your tips for early debt repayment: “Six tips to accelerate debt reduction”.

Another thing to remember: if your employer repays your student liabilities, sometimes it means that you should declare it in your personal tax report. Make sure to clarify this issue with the legal department at work.

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