While having student loans can be a daunting financial commitment, there is an opportunity to claim interest paid on your taxes. This is called the Student Loan Interest Deduction, and it can help reduce your tax liability if you are eligible.
While many borrowers have claimed this in the past, with the pandemic relief, this may be the first year that a student can claim this in several years. Why? Well, pandemic relief reduced interest to 0% and suspended payments for borrowers with federally held loans, like Direct Loans and certain FFEL loans. Most borrowers who received pandemic relief on their student loans, did not make voluntary payments. However, when these loan re-entered repayment at the end of 2023, it could have resulted in some payment of interest which you may be able to claim as your student loan interest deduction.
Understanding the Student Loan Interest Deduction
The student loan interest deduction allows you to deduct up to $2,500 a year in interest you paid toward a student loan. The definition of student loan in this case, allows you to claim interest paid on a federal and/or private student loan.
There are income limits to qualify for the deduction. Filing taxes for the 2023 tax year, there is a phase out of eligibility for individuals with a modified adjusted gross income of $75,000 ($155,000 for filing jointly), and a complete phase out for individuals with a modified adjusted gross income of $90,000 ($185,000 for those filing jointly).
Which Loans are Eligible for the Student Loan Interest Deduction?
In general, federal student loans and private student loans are eligible. Payments made toward a parent PLUS loan or a private student loan borrowed for your child would also be eligible.
Who is Eligible and How to Claim?
Not everyone with student loans is eligible for this deduction. To claim it, you must meet certain criteria, like having paid interest on a qualified student loan in the tax year and meeting income thresholds.
Where to Find your 1098-E
At the end of each year, your student loan servicer will issue you a 1098-E if you paid more than $600 in student loan interest. Your 1098-E will report the total amount of interest you paid on your student loans with that servicer. If you have multiple loan servicers, you will need a 1098-E from each one.
If you paid less than $600 in interest to a specific servicer, your student loan servicer is not required to provide you with a 1098-E. However, you can contact your servicer to determine the amount of interest you paid. You can use the information received to file your taxes.
What is a Tax Deduction?
A tax deduction reduces the amount of your income which is subject to tax. By reducing your taxable income, you are likely reducing your tax liability. The student loan interest deduction is known as an “above the line” deduction, meaning it doesn’t matter whether you itemize your deductions or take the standard deduction. An above the line deduction will typically reduce your adjusted gross income.
Maximize Your Deductions Next Year
Some borrowers may find that they are not able to claim the full $2,500 deduction this year due to the pandemic relief. However, if you will be repaying your students loans through 2024, you may be able to maximize this benefit to help reduce your tax liability. It’s always wise to discuss your situation with a certified tax professional.
Do I Owe Taxes on Student Loan Forgiveness?
If you are one of the lucky 3.9 million borrowers who received student loan forgiveness, you may be worried or concerned about your tax liability. Typically, only certain types of student loan discharge or forgiveness are subject to taxation—the discharged amount is considered “earned income”. However, at the federal level, thanks to the American Rescue Plan of 2021, any forgiven amount of student loan is not subject to federal tax. But there are a handful of states which may tax forgiven amounts of student loan debt.
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