As of the first quarter of 2018, student loan debt in America exceeded $1.5 billion for the first time, according to the Federal Reserve. You might be able to defer payments on your student loans while you are still in school, but after graduation, the time comes when lenders expect you to start repaying the loans. While the debt won’t help your bottom line, it can help you when it comes to your income taxes. There isn’t a student loan tax credit, but there is a student loan repayment deduction that can help you reduce your tax liability.
TL;DR (Too Long; Didn't Read)
Most taxpayers qualify to deduct at least a portion of their student loan interest on their taxes.
Student Loan Tax Deduction
Many taxpayers usually qualify to deduct interest paid on qualifying student loans. The amount you can deduct is the smaller of the amount of interest you actually paid during the calendar year and $2,500. For example, if you paid $3,000 in student loan interest, you can only deduct $2,500. If interest is simply capitalized on your student loan, you can’t deduct that interest during the year. However, when you eventually pay that interest off in the future, you can deduct the interest in that year.
Limitations on Deductions
The tax code does have several limitations on how much you can deduct. First, you can’t claim any deduction on your taxes if you’re married but you file a separate return. Second, your deduction can be reduced or eliminated if your income is too high. The $2,500 maximum deduction starts dropping when your modified adjusted gross income exceeds $65,000 if you file a single return or $135,000 if you’re filing a joint return. You can’t deduct any of your interest if your modified adjusted gross income exceeds $80,000 if you file a single return or $165,000 if you file as married filing jointly.
2018 Tax Law
The student loan interest deduction isn’t an itemized deduction, and it was unaffected by the tax law passed at the end of 2017. As a result, you can continue to claim a tax deduction as an adjustment to income for your student loan interest, even if you claim the larger standard deduction.
No Changes From 2017
If you’re still filing your 2017 income tax return, you can only claim student loan interest paid during the 2017 calendar year. You should receive a 1098-E from your student loan lender if you paid more than $600 in student loan interest. This form is also shared with the IRS so your interest deduction can be verified.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."