In general, liabilities are often discouraged in our society. However, there are some types of liabilities that the government partially subsidizes as a way to encourage financial moves that are deemed beneficial to society. One of those types is student loans.
Since 1997, it’s been possible to deduct your student loan interest. However, it was only a few years ago that the time limit restriction was lifted. Now, you can continue to deduct your student loan interest indefinitely. This is a boon to me since I was on the verge of being unable to claim my student loan interest any longer when the rules changed.
Just because you can reduce your tax bill now with the help of a student loan interest tax deduction, though, doesn’t mean that it will always be available to you. Here are some of the things to keep in mind when it comes to deducting your student loan interest:
There are phaseouts to the student loan interest tax deduction. As with most of these types of adjustments, the amount varies, changing with inflation. The phaseout begins when you have modified adjusted gross income (MAGI) of $60,000 if you file singly, and $125,000 if you file jointly. You can’t take the deduction at all once your income reaches $75,000 and $155,000, respectively.
So, as you engage in your tax planning, it’s important to pay attention to the fact that you might have phaseouts slowing you down with your interest tax deduction. Look for other strategies to keep your MAGI within range. It can be a bit tricky, since figuring your MAGI might rely on other deductions that are subject to phaseouts.
Also,. realize that you can’t claim a deduction on your student loan interest if the loan hasn’t been used on non-qualifying expenses. Just as you should keep your business finances separate from your personal finances, you need to keep the money you use for education separate from other personal expenses. Qualifying expenses for your student loans include :
- Required school supplies and equipment
- Necessary transportation costs
You can also use your student loan money to pay for your housing and your food. However, what you pay has to be within the amount given by your school as a cost of attendance. This means that you can’t deduct student loan interest when you use the money to live opulently.
Cap on Your Student Loan Deduction
Even if you eligible in terms of your MAGI, there is still a limit to how much student loan interest you can deduct on your taxes. You can only reduce your income by up to $2,500 using this deduction. However, this is still a pretty decent deduction, and if you are on the edge of another tax bracket, it can help keep you in a lower bracket and save you money on taxes.
You have received a 1098-E form, showing how much you paid in student loan interest, from each lender. You should file this form along with your tax return if you want to claim the deduction. Before you claim this deduction, make sure that you consult with a knowledgeable tax professional who can help you figure out what you can do in terms of deductions, as well as credits.