The student loan tax deduction could potentially save you hundreds of dollars in federal taxes. If you qualify, you can deduct interest paid on student loans from your taxable income for the same year. By taking advantage of the student loan interest tax deduction, borrowers can decrease their tax burden and ultimately save money each year.
But beware: there’s a wrinkle for 2020. If you deferred student loan payments, you might have paid less than $600 in loan interest. That interest could still be deductible, but the loan servicer is not required to send you the special form — called a Form 1098-E — if the total was under $600.
As with most tax deductions, there are strict rules governing the use of the student loan interest tax deduction. Here’s what you should know about how it works, and special guidance to avoid missing out on interest paid in 2020.
What is the student loan interest tax deduction?
A tax deduction decreases your taxable income, which is the amount the IRS uses to assess how much you owe. The higher your taxable income, the more you’ll pay. One way to decrease that amount is to use every deduction you’re eligible for.
The student loan interest deduction lets borrowers deduct up to $2,500 worth of student loan interest paid over the course of a year. This specific deduction is an “above the line” deduction, meaning you can use it whether you take the standard deduction or the itemized deduction. It’s also available for borrowers with either federal or private student loans.
This deduction could save you hundreds in taxes. For example, if you’re in the 22% tax bracket and paid $2,500 in student loan interest, using the deduction will decrease your federal income taxes by $550. If you’re in the same tax bracket and paid $2,000 in student loan interest, you’ll pay $440 less in federal income tax.
Who is eligible for the student loan tax deduction
To be eligible for the student loan tax deduction, your income must be below a certain threshold. Individuals filing taxes who earn below $70,000 will be eligible for the full deduction. They can receive a partial deduction if their income is between $70,000 and $85,000. Anyone earning more than $85,000 will be phased out.
Married couples filing jointly can claim the full deduction if they earn less than $140,000. They can take a partial deduction if their income is between $140,000 and $170,000. The deduction is eliminated for couples earning more than $170,000. Married couples filing separately are not eligible for this deduction.
Another requirement is that the interest must come from a student loan used to pay for qualified educational expenses, like tuition or textbooks. If you used the student loan to pay for rent, health insurance, transportation or other living expenses, you can’t deduct the interest on your taxes.
How to file for the student loan tax deduction
Each of your student loan servicers may send you a 1098-E form showing how much you paid in total loan interest for that year. If you have multiple servicers, you’ll have to add up those numbers to come up with the total to use when filing your taxes.
It may be worth double checking that the amounts listed on the 1098-E are correct. Errors are uncommon, but entirely possible. If the form says that you paid less interest than you actually did, you’re ultimately losing out on tax savings.
Add up the interest paid on all of your 1098-E forms, and use that number as your student loan interest deduction when you file your federal taxes.
What to do if you haven’t received your 1098-E forms by early February
If you’re due a 1098-E from a loan servicer and haven’t received it, you may have an old mailing address listed on your account. You can find your federal loan servicer through the official Federal Student Aid website or by calling 1-800-4-FED-AID. If you don’t have record of your private loan servicers, try checking your official credit report at AnnualCreditReport.com and see which companies are listed.
You can call the providers and ask them to resend it. The form should also be available online through your account portal. Log on and check the documents tab to see if the tax statements are available.
The big mistake for borrowers who paid less than $600 in interest last year
Here’s a potential pitfall for many students: loan servicers are only obligated to send a 1098-E form if you paid $600 or more in interest for the year.
Many borrowers likely paid less than $600 in 2020 because federal student loan payments were deferred for most of the year. If you only made student loan payments in January and February of last year, you may not have paid $600 or more in total interest.
Also, if you had loans from multiple sources, you may have paid less than $600 for each of those servicers. This could also result in you not receiving a 1098-E form from each of these providers.
But even if you paid less than $600 in interest, you can still deduct that amount on your taxes. You’ll just have to do the math yourself.
You can do this by calling your loan servicer and asking them what the yearly total interest was for 2020. They may also have a year-end summary available on your online account. You can even go through all the 2020 monthly statements and do the math manually.
Take your time when adding up these figures and make sure you use the correct number. If you list an incorrect number, the IRS may reject your return. This will also delay your tax refund and possibly force you to file an amended tax return.
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