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You might have to pay taxes on your student loan payments. In fact, the IRS considers student loan debt to be just like any other kind of debt that you have, so you might be on the hook for paying federal taxes on the debt that you owe. However, there are some instances where those payments may be eligible for a tax deduction. Additionally, the loans themselves may be deductible if they were taken out to pay for education expenses.
As a student, you have more to worry about than just paying for your education. When you begin making student loan payments after graduation, you may be surprised to learn that paying off student loans is tax-deductible. All student loan payments are completely tax-deductible, regardless of whether you pay them in one lump sum or over a period of months.
Taxes and student loans are not a fun hobby, but you will still have to deal with them during tax season – and you better know what you are doing.
Are student loan payments tax deductible? How do the tax rules take gross income into account? We are prepared to answer these and other questions.
The answer is no. You cannot deduct student loan repayments from your taxable income.
But that doesn’t mean people don’t try.
In the past, the Home Equity Line of Credit (HELOC) was a loophole for the tax deduction of student loan repayments. In the past, some borrowers opened such an account and used the funds to pay off student loans because they were tax deductible.
The Tax Cuts and Jobs Act of 2018-2026 repealed this benefit. However, this does not apply if the money is used exclusively for the taxpayer’s home.
Travis Hornsby, founder of Student Loan Planner, says it’s not uncommon these days for people to take out convenience loans (a type of business loan) and use them to pay off their public or private student loans.
Interest on business loans is tax deductible, so that way they can get the money back. However, according to the IRS, this is not allowed. You cannot deduct interest that is personal interest on a business loan.
Student loans are a personal expense and paying them off with a business loan is a personal benefit. This is not good for your business. This question will come up when you are audited for debts of your business.
Hoping you don’t get caught is not a valid reason to try to deduct your student loans from your taxes. It casts shadows and puts your financial health at risk. Instead, find out if you qualify for the student loan interest deduction.
Can I deduct interest on student loans? is the right question to ask. Instead of trying to combine student loan repayments with home or business loan deductions, which are not allowed, you can try to deduct the interest on student loans. The IRS allows a deduction for student loan interest, but the bad news is that not everyone can claim this deduction.
Under the federal student aid program, you can get a tax deduction for interest on student loans taken out for yourself, your spouse, or one of your family members. As long as you are paying interest, the loan can be given to someone else.
This benefit applies to all loans (not just federal student loans) used for higher education expenses. The maximum deduction is $2,500 per year, according to the Federal Student Aid Program. The cost of higher education includes costs such as tuition, fees and living expenses.
According to the IRS, up to $2,500 can be claimed as an income adjustment. You can use this deduction if you have an itemized deduction or if you use the standard deduction, depending on how you file your taxes. To claim the deduction, you must:
- Have an adjusted gross income (MAGI) that is less than the annual set amount.
- Interest paid on a qualified student loan during the applicable tax year.
- Be legally obligated to pay interest on a qualified student loan.
- Have a different status from a divorced marriage.
- You cannot be included as a dependent on another person’s tax return (you or your spouse if you file jointly).
The main obstacle for most taxpayers is the MAGI. In other words: If you have a certain amount of income, no deduction is allowed.
What is too expensive to take advantage of the full interest deduction on student loans? The amount you can get as a deduction is gradually reduced. It depends on the income bracket you are in.
For the 2020 tax year, the interest deduction will not apply if your MAGI :
- 70,000 to $85,000 if you are applying as a single person, head of household or widower.
- From $140,000 to $170,000 if you file a joint tax return.
You cannot claim the deduction at all if your MAGI is more than $85,000 for an individual and $170,000 or more for a joint tax return.
If you’re not sure if you can deduct interest on student loans, use the IRS tax tool. It provides an interactive tax wizard to help you answer the question of whether you can deduct interest on student loans.
Ask me about your student loans
When you file your taxes this year, there are a few things to keep in mind to maintain your financial health:
- Make sure you pay your student loans on time and don’t fall behind. Your tax refund may be credited if you don’t pay on time.
- Use our student loan interest rate calculator to find out how much interest you’ll pay. You can compare it to Form 1098-E Return of Interest on Student Loans. You will also be able to see how much of your monthly payment actually goes towards paying off the principal.
- Look for your lender’s or loan officer’s Form 1098-E, which shows the interest you paid on the loan. You need it to claim a deduction.
- Examine Form 1040 of the most recent tax return.
Finally, check out our tax strategies if you are married. You can save money by changing your student loan repayment plan.
Tax rules change every year, so you may one day be able to deduct student loan payments.
Hornsby suggests that companies provide student loan repayment assistance structured as a type of 401(k) benefit. It’s good to know that people are trying to make a difference, because student loan debt for millions of Americans is astronomical.
Until then, we advise you not to try to find a hidden escape route.
If you need help with your taxes, we are your primary source for information on student loan repayment plans that include your taxes. If you are looking for a tax preparation service to work with, we recommend Student Loan Tax Experts. Simply go to the Student Loan Tax Experts website and list Student Loan Planner as your referral source to receive a free 30-minute consultation and discounted tax preparation services.
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Frequently Asked Questions
Are payments to student loans tax deductible?
“Payments to Student Loans Are Not Tax Deductible” is a misleading headline because it implies that there is a way to deduct student loan payments from your taxes and that this write-off only applies under a specific set of circumstances. In fact, the IRS has ruled that payments made to student loans are not tax deductible. (This is why people who pay the minimum required payment on their student loans can sometimes be surprised when they receive a large tax bill in the spring.) The truth is that nobody gets a tax deduction for making student loan payments.
Everyone has to pay for college somehow, whether it be through scholarships and grants, student loans, or their own savings. Is your student loan debt weighing you down? Put yourself in a better financial position by filing your taxes for the past year, with money left over for your student loan. In the United States, student loan interest is tax deductible, which means you can lower your adjusted gross income before you start calculating your taxable income.
Is student loan interest deductible if you don’t itemize?
While the most common tax deduction is the student loan interest deduction, there are some limitations. First of all, you can only deduct student loan interest if you itemize your taxes. If you are entitled to a standard deduction, you cannot deduct student loan interest. Secondly, you must be legally obligated to pay the student loans. If you are cosigner on a student loan, you are not legally obligated to pay it off. If you are the student and you have a cosigner, that cosigner is legally obligated. Deductions can help lower your taxes, and an IRS deduction for student loan interest can save you a chunk of change over the course of the year. But if you don’t itemize, you might not get a deduction. It all depends on how much you owe in student loans, how much you earn, and whether your loan is a qualified education loan under IRS rules.
Are loan payments tax deductible?
Paying off student loans isn’t easy — or cheap. The interest on these loans is usually quite high, and repaying your loans can easily become your biggest monthly expense. When you fill out your first tax return after paying off your student loan, you may be surprised to find out you’re not getting as much of a deduction as you expected. In fact, you may find that you’re not getting any deduction at all. This text is sensitive. Click edit and regenerate for new copy.