You’ve finally graduated after all those years of hard work in school. Your diploma is on the wall and you’re repaying the student loans that enabled you to access your education. However great it may feel to be finished college, for many graduates, the repayments can quickly become a source of stress. And it’s not just about having enough spare income to afford the payments, but about understanding how they affect your tax situation. If you want to find out more about how student loans can affect your taxes and take advantage of the available deductions for interest, read on as we’re about to uncover the important things you should know.
How Do Student Loans Affect Tax Returns?
It’s an interesting question. If you are still a student and receiving disbursements, you do not need to declare them as income as it is money that you will have to repay in the future. However, if you are a graduate who has started repayments, then it may affect your tax returns. While the principal amount you borrowed is not deductible, it may be possible to use some of the interest that you pay as a deductible, although this depends on your income, the type of loan and your tax filing status. When you pay interest on federal or private student loans you may be able to reduce your taxable income by up to $2500 per year. However, you should be aware that the more you earn, the less interest you will be able to write off and there is a limit where deductions are not available at all. This limit changes every year and depends on your status.
The IRS Form 1098-E
You can use Student Loan Interest Statement (IRA Form 1098-E) to claim the interest deduction when it’s time to file your return. Your lender will send this form to you when you pay a minimum of $600 in qualified interest.
Not Sure Whether You Qualify for a Tax Deduction
If you’re not sure whether you qualify for a tax deduction, it’s worth taking some time to get advice. Being eligible for interest deduction means the difference between having to pay out possibly hundreds of dollars in tax or looking forward to a lower IRS bill or even a tax refund. So, it makes sense to at least do some research.
How to Find Out More About Your Tax Liabilities and Deductions
If you need to clarify what is and isn’t deductible, you can call the IRA on their toll-free number to find out more about tax offsets. Alternatively, you can access a worksheet entitled Tax Benefits for Education, which explains more about tuition reductions, how the interest deduction works and how to claim credits. To find out whether you qualify for the deduction you can take the IRS online interview, which should take about 10 minutes to complete. Of course, if you don’t have the confidence to file your taxes yourself, a certified account or financial advisor will be able to help.
