Chances are that if you have student loans, you need every bit of extra cash that you can get. Did you realize that your student loans might be able to generate some cash for you?
Under certain circumstances, you may be able to save on your tax bill by deducting the interest that you pay on your student loan. The total deduction from your taxable income could be as much as $2,500. As a final bonus, you do not have to itemize to claim this deduction.
To be eligible for the deduction, your loan must meet certain qualifications. It must have been made to cover qualified education expenses as defined in IRS Publication 970, including tuition, fees, and most room and board charges. The loan cannot have come from a relative or via a qualified employer plan, and the educational expenses must be incurred by you, your spouse, or your dependent for a qualified educational institution. (There are several expansions of who classifies as a dependent for purposes of this deduction.) You are not eligible if you can be claimed as a dependent on another person's return.
The student in question must be enrolled at least half-time as defined by the educational institution, but the half-time designation must meet certain Federal Standards. Refer to Publication 970 for other details on collective eligibility requirements.
The Student Loan Interest Deduction is limited based on your modified adjusted gross income (MAGI), the adjusted gross income from your tax form with various subtractions based on which tax form you are submitting. The phase-out period for eligibility begins at $70,000 for single taxpayers and $140,000 for those married and filing jointly. Beyond a MAGI of $85,000 for a single taxpayer or $170,000 for married filing jointly, you cannot claim the Student Loan Interest Deduction at all. (If your status is married filing separately, you cannot claim this deduction at any income level.)
When part of your educational expenses is paid for by various tax-free sources, adjustments must be made to the amount of deduction you can claim. Examples where adjustments are necessary include employer-provided assistance, tax-free distributions from a qualified tuition program or a Coverdell educational account, and interest on U.S. savings bonds. You cannot deduct any amount that can be deducted under other categories of the tax law (such as mortgage interest).
On the positive side, a few other costs can be lumped in the deduction along with simple interest on the student loan. A loan origination fee qualifies if it is for the use of money instead of lender-provided property or services (for example, processing costs). Unpaid interest that is added to the principal (also known as capitalized interest) is also deductible, as is interest on refinanced student loans within certain parameters. You can also deduct interest on any extra or voluntary payments that you make.
As long as you paid at least $600 of interest on a student loan, you will receive a Form 1098-E from the lender that holds your student loan. However, you can still deduct your qualifying student loan interest if it is less than $600 — it just becomes a bit harder to calculate. Publication 970 gives a fairly complex example of how to calculate your deductible interest.
If you and your student loan qualify, make sure that you take advantage of the Student Loan Interest Deduction when tax time rolls around. Turn a negative into a positive by making your student loan debt work to your advantage.
The IRS and Treasury Department have extended the 2020 tax filing deadline from April 15 to July 15, due to the COVID-19 pandemic. In the interest of safety and to curb the spread of the coronavirus, all Taxpayer Assistance Centers have been closed temporarily and face-to-face IRS services have been suspended until further notice. See the IRS Coronavirus Tax Relief page for the latest updates.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Originally Posted at: https://www.moneytips.com/deduct-your-student-loans
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