Who Can Still Get The Full Student Loan Interest Deduction For 2020
There are still plenty of people who can claim the full interest deduction this year. There are millions of borrowers with private student loans who werent granted any relief on their interest rates this year, though some may have gotten temporary hardship forbearances from their lenders.
There are also millions of borrowers with older federal loans that did not qualify for the relief in the CARES Act. That includes borrowers in the Federal Family Education Loan program, through which the government backed loans that are actually owned by commercial lenders, and those with Perkins Loans, some of which are owned by colleges.
There are also income cutoffs to qualify for the maximum value of the deduction. If youre a single filer, you need a modified adjusted gross income of $70,000 or less. If youre married and filing jointly, the cutoff is $140,000. Borrowers earning up to $85,000 or $170,000 can qualify for a partial deduction.
Loans that count toward the deduction include any loan used to pay for an eligible student for qualified education expenses, such as tuition, fees, books, supplies, and room and board, at an eligible institution.
Finally, there are a few other stipulations to be able to claim this deduction, including that your filing status isnt married filing separately and that you cant be claimed as a dependent on another persons taxes. You also cant claim the deduction for payments you made on someone elses behalf .
Employer Student Loan Repayment Assistance Programs
About 8% of employers offer student loan repayment assistance programs , according to the Society for Human Resource Management .
Typically, an employer will provide employees with $100 per month to help them repay their student loans.
Normally, employer LRAPs represent taxable income to the employee. However, the CARES Act included an exclusion from income for payments of principal and interest by an employer on the employees student loans through December 31, 2020.
Congress might decide to extend the exclusion from income or make it permanent.
Are There Any Other Deductions For My Education
The American Opportunity Tax Credit is the best tax credit for claiming back cash when youre still in school. If you meet the conditions, you could claim up to $2,500. The Lifetime Learning Tax Credit can also be claimed and is worth $2,000. But do keep in mind that you cant claim both.
You must examine the conditions of each and see which credit would be best for you.
When married and filing jointly, you have two choices. You can claim the student loan tax interest rate deduction or one of the above education credits.
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How Do Student Loan Interest Payments Lower My Taxes Owed
Paying back your student loan wont generate any tax breaks, but paying the interest on that student loan can, by reducing your income tax. The max deduction is $2,500 for your 2020 tax return. This max is per return, not per taxpayer, even if both spouses on a joint return qualify for the deduction.
The student loan interest amount goes on our Student Loan Adjustment screen. When you enter the interest amount, well figure the deduction for you automatically.
You must meet all of these requirements:
- You paid interest during the tax year on a qualified student loan.
- Your filing status is not married filing separately.
- Your modified adjusted gross income must be less than $70,000 if filing single, head of household or qualifying widow . For married filing jointly, the MAGI must be less than $140,000, and the deduction phases out at $170,000.
- You are not claimed as a dependent on someone elses return.
Note: In times past, you had to be responsible for the loan debt and pay it back yourself in order to qualify for the deduction. But nowadays, if your parents pay back the loan, the IRS lets you claim the deduction if your parents dont claim you as a dependent. Also remember that the deduction is for the person who took out the student loan. So, if your parents actually got the loan, but you pay it back, the deduction is theirs.
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What Is A Qualified Student Loan
First of all, your loan cannot be from one of your relatives or through an employer-provided educational assistance program.
Any public or private student loans can qualify as long as they go entirely toward qualified education expenses. A qualified expense is money you spend on the things that are required in order for you to enroll or attend an institution.
The following are qualified expenses:
Tuition and fees
Books and other class supplies
Other necessary expenses, like transportation
The institutions that qualify include most colleges, universities, and vocational schools. It doesnât matter if the institution is public, nonprofit, or private.
You just need to have been enrolled at least half time in a program that leads to a degree, certificate, or similar credential.
Can I Deduct Student Loan Interest
To deduct student loan interest, the qualified student loan you took out must be used to pay for your education costs or a spouses or dependents education costs while attending an eligible college or university. The financial institution must qualify to participate in the program as determined by the U.S. Department of Education.
Some other educational institutions may also be eligible, like technical and vocational schools, for-profit and nonprofit institutions, or other postsecondary institutions. The loan must be made by you and not from an employer benefits plan or relative, and you must pay back the loan in a realistic time frame. However, the IRS is flexible if you are making an effort to pay it back.
The Student Loan Interest Statement, IRS Form 1098-E, is the form used to report student loan interest payments to you and the IRS. Your loan servicer will provide at least one 1098-E form if you paid $600 or more in interest during the tax year.
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What Is Form 1098
Form 1098-E is a tax form that tells you how much you paid in interest on your student loans over the past year. Its sometimes called the Student Loan Interest Statement.
Youll need to file Form 1098-E to deduct student loan interest payments from your taxes. You can typically claim interest on payments for student loans youve used toward qualified education expenses. These expenses include tuition, room and board, supplies, textbooks and other expenses that come with studying for a degree.
Exceptions might include loans you used to pay for postgraduate expenses, like a bar study course or relocating for a medical residency, if your school doesnt consider them part of the cost of attendance. If youre paying off these types of student loans, talk to a tax specialist to find out if theyre eligible.
Does Refinancing Affect My Student Loan Interest Deduction
It depends. You can most likely deduct student loan interest from your taxes after refinancing your student loans to get a better interest rate or more flexible loan term. However, you may not be able to deduct your student loan interest if you refinance for more than the original amount of your loan.
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Student Loan Interest Deduction Phase
The phase-out ranges for this tax credit depend on your filing status. As of tax year 2020, the return you would file in 2021, they were:
These figures are adjusted for inflation, so they can change slightly year to year. The IRS typically announces inflation adjustments at the end of the tax year. These thresholds were accurate as of November 2020.
You can deduct up to $2,500 in student loan interest or the actual amount of interest you paid, whichever is less, if your MAGI is under the threshold where the phase-out begins. Your limit is prorated if your MAGI falls within the phase-out rangefor example, $70,000 to $85,000 if you’re single.
Unfortunately, your student loan interest isn’t deductible at all if your income is more than the ceiling where the phase-out ends.
Using A 529 Plan To Repay Student Loans
The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, expanded 529 college savings plans by allowing up to $10,000 per borrower in tax-free student loan repayment as a qualified expense.
This benefit is available to the 529 plans beneficiary and the beneficiarys siblings. With a change in beneficiary, parents can also benefit from this student loan tax break.
The $10,000 cap is a lifetime limit per borrower.
Note that not every state conforms with federal law. So, some states will treat student loan repayment as a non-qualified distribution for state income tax purposes even though it is tax free for federal income tax purposes. In these states, the income portion of a non-qualified distribution is subject to ordinary state income taxes, plus possible recapture of state income tax credits or tax deductions attributable to the distribution.
The SECURE Act became law on December 20, 2019. Although the legislation was retroactive for all of 2019, most borrowers who use qualified distributions from 529 plans to repay student loans will do so in 2020 or a subsequent year.
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Which Student Loans Qualify Which Dont
The student loans that qualify for the interest waiver during the pandemic are any loans owned by the Department of Education. These are Direct Loans, subsidized and unsubsidized Stafford Loans, Parent and Graduate Plus Loans and consolidation loans. The student loans that do not qualify for the interest waiver are many. They are the Federal Family Education Loans and the Perkins Loans, if held commercially by lending institutions. If they are held by the Department of Education, they are also covered.
The only student loans that qualify for the student loan interest deduction are those that are for the benefit of you, your spouse or your dependent and spent on qualifying education expenses. Private loans or loans from an employee-sponsored plan are not eligible. The loan must be for an academic term and the student must be at least half-time to qualify.
How Much Of Your Tax Return Can Student Loans Take
The government can also take money from your disability or retirement Social Security payments or even your tax return to pay your delinquent student loans. This is called an offset rather than a garnishment. With disability and Social Security payments, the 15% of disposable pay rule still applies. However, your entire federal and/or state tax return can be taken. Might be a good reason to adjust those withholdings on your W-4 or reduce your quarterly estimated payments so your return is smaller.
The government can seize lottery winnings, can sue you to put a lien on your property, or can do bank levies as well. It is probably best to just enroll in an IDR program if you’re having trouble making your payments.
What do you think? What interactions have you seen between your taxes and your student loans? Comment below!
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Who Can Deduct Student Loan Interest
You can deduct interest you paid on a student loan if you took out the loan to pay expenses for yourself, for your spouse or for someone who was your dependent at the time you took out the student loan. The loan must have been used to pay “qualified education expenses.” Such expenses include:
- Tuition and fees
- Books and supplies required by the school
- Other expenses necessary to get an education. This can include transportation to and from campus.
You can deduct interest on both federal and private loans, but not on loans from a relative or from a tax-advantaged retirement plan such as a 401.
Documents You Need To File Your Tax Return
Here are the documents youll need to file your tax return and claim your deduction:
- W-2: If you were employed in a job and paid income tax, youll need a W-2 from each of your employers to file your taxes accurately. Youll also need W-2s from any provider of taxable scholarships, grants or tuition assistance.
- 1098-E: To claim the student loan interest deduction, get a 1098-E from any loan servicer you sent payments to, so you can document all of the interest that you paid during the tax year.
- 1098-T: To be eligible to claim the American opportunity credit or the lifetime learning credit, youll need a Form 1098-T, Tuition Statement, from your school.
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How The Student Loan Interest Deduction Works
The Internal Revenue Service outlines a variety of tax deductions that allow individuals to reduce their taxable income for the year. One of these is the student loan interest deduction, which allows for the deduction of up to $2,500 of the interest paid on a student loan during the tax year. So individuals who fall in the 22% tax bracket and claim a $2,500 deduction can reduce their federal income tax for the year by $550.
Taxpayers who wish to use the deduction must meet certain qualifications. For instance:
- The student loan must have been taken out for the taxpayer, the taxpayer’s spouse, or dependent. Parents who help legal borrowers with repayment cannot claim the deduction.
- The loan must be taken out during an academic period for which the student is enrolled at least half-time in a program leading to a degree, certificate, or other recognized credential.
- The loan must be used for qualified higher-education expenses and cannot include room and board, student health fees, insurance, and transportation.
- The loan must be used within a reasonable period of time after it is taken out, and the proceeds must be disbursed either within 90 days before the academic period starts or 90 days after it ends.
- The school where the student is enrolled must be an eligible institution, including all accredited public, non-profit, and privately owned for-profit post-secondary institutions that participate in the student aid programs managed by the U.S. Department of Education.
How To Calculate Your Deduction
Calculating your deduction begins with your MAGI. This is your all-important adjusted gross income before you take other tax deductions into account, including the student loan interest deduction you’re hoping to qualify for. You can’t deduct this first before calculating your MAGI. That would be like claiming a tax break twice for the same expense.
You must also add back the following exclusions and deductions if you took any of them, but these are somewhat uncommon:
- The foreign earned income exclusion
- The foreign housing exclusion
- The foreign housing deduction
- The income exclusions for residents of American Samoa or Puerto Rico
Most taxpayers will find that their MAGIs are very close toif not identical totheir AGIs. In the case of the student loan interest deduction, you might find that you only have to add back the deduction itself.
Divide your MAGI by $15,000 after you’ve calculated it. Convert the answer to a decimal with three decimal places. Use 1.000 for the calculation if it’s more than 1.000. If it’s less than 1.000, use it as is. Now multiply your student loan interest paid up to $2,500 by the decimal. The answer will be $2,500 or less.
You won’t have to dig through all your student loan statements for the year, trying to track down how much interest you paid. Your lender should send you a Form 1098-E sometime after the first of the year. The amount of interest you paid is reported in Box 1 of the 2020 version of the form.
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How Much Student Loan Interest Can You Deduct On Your Taxes
The short answer is that you can deduct $2,500 in student loan interest in both the 2020 and 2021 tax years. But there’s a little more to the story.
First off, the student loan interest you deduct must have been paid during the tax year, not just billed. In other words, if you were billed a total of $3,000 in student loan interest for the year but your repayment plan only required you to pay a total of $1,000, that’s all you’re allowed to deduct.
Furthermore, the $2,500 limit is per tax return, not per person. So, married couples can only deduct a total of $2,500 in student loan interest, even if both spouses paid student loan interest during the year.
Finally, not everyone qualifies for the deduction. We’ll get into the specifics in the next section, but you need to meet certain income requirements as well as requirements pertaining to the student loans themselves.
What You Need To Know About The Deduction For Student Loan Interest
Whenever you pay off your student loan, its not a case of just paying off the amount you borrowed. Youre also paying the interest rates. When you take advantage of the student loan interest tax deduction, youre essentially taking off the interest paid against any taxable income, which ultimately means you pay less in tax to the Federal government.
For example, lets say your income came in at under $65,000 for the previous year. You will qualify for the maximum interest rate deduction. From $65,000 to $80,000, this deduction is reduced.
You can take this deduction without itemizing. So, you can also take the standard deduction.
Take note that if your parents took out the student loan in their name, they will have to claim the deduction on their tax return. However, if your parents registered you as a dependent, then neither of you can claim the deduction.
Finally, you can also take this deduction if youre paying off your student loan while still in school full time.
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