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Everything You Need to Know About Deducting Student Loan Interest

Everything You Need to Know About Deducting Student Loan Interest


Welcome to that special time of year that involves collecting all your tax documents, topping up IRA accounts, and figuring out whether to do your own taxes or use an accountant.

For recent graduates and current students, there are a few benefits the IRS offers to help defray the costs of education. Here’s an overview of student loan interest tax deductions and credits related to education costs.

Student Loan Interest Deduction American Opportunity Tax Credit Lifetime Learning Credit
Borrowers of qualified federal and private education loans may be able to deduct up to $2,500 in interest on their federal income-tax returns. This deduction is available over the life of your loan(s), and the repayment plan you select doesn’t matter. The American Opportunity Tax Credit allows you to claim up to $2,500 of the cost of tuition, fees, books, supplies and other education-related expenses paid during the first four years of post-secondary education. 40% of the credit (up to $1,000) is refundable, so you can claim it even if you owe no tax. You don’t have to be a degree-seeking student to qualify for this credit, rather, it can be claimed by anyone who takes an undergraduate, graduate, or professional course at an eligible institution during the taxable year.

The Student Loan Interest Tax Deduction: Is My Student Loan Interest Tax Deductible?

A qualified education loan is one used solely to pay for the cost of higher education for you, your spouse, or a dependent, so long as the student was enrolled at least half-time in a degree program at the time of the loan. This includes federal and private loans, including private loans used to refinance other student loans.

A qualified student loan is one that is borrowed for the purposes of funding qualified education expenses that were you, your spouse or a dependent, paid for within the given parameters provided by your lender, and solely for the education provided during your time as a student. Eligible expenses that loans are used for could include tuition, room & board, books and supplies, etc.

You can deduct the full amount of interest you paid (up to $2,500) during the taxable year, so long as your modified adjusted gross income (MAGI) doesn’t exceed $80,000 as a single/head of household filer, or $160,000 as a married couple filing jointly (but note, if you’re married filing jointly you can only claim one deduction, not two.) Beyond those amounts, the deduction is gradually reduced.

While you don’t have to itemize your return to qualify for the deduction, it’s not available on Form 1040EZ. You’ll have to use either Form 1040A or Form 1040.

To take advantage of this deduction, keep an eye out for Form 1098-E from your lender(s).

However, note that it’s not accessible if you’re married and filing separately, or if you can be claimed as a dependent on someone else’s return.

American Opportunity Tax Credit: What Is It & Who’s Eligible?

If you were enrolled in college in 2015 and attended at least half time, you could qualify for the American Opportunity Tax Credit. The American Opportunity Credit allows you to reduce your tax liability dollar-for-dollar. Like the student loan interest deduction, you’ll need to file Form 1040 or 1040A to take advantage of this credit. You can be currently enrolled in your first of four years to apply for this credit, and only need to enroll in at least one semester of college during the taxable year you are filing for.

Only one credit is available for eligible students each year and the amount of the credit equals 100% of the first $2,000 of qualified expenses, plus 25% of the expenses that exceed the first $2,000. The maximum amount eligible for the credit is $2,500.

The college or university you attended will provide you with a copy of Form 1098-T that reflects amounts billed for tuition and related expenses that can use toward your credit. You must also fill out sections of the IRS Form 8863 and attach it to your personal income tax return to receive the American opportunity tax credit.

The credit is gradually phased out if your MAGI exceeds $80,000 for single/head of household filers or $160,000 on a joint return.

Can I Claim the Lifetime Learning Tax Credit? Dollar-For-Dollar Tax Assistance

Whether you’re working toward a degree or taking a class on the side for self-improvement, this credit might help defray your outlay — as long as the institution where you’re taking a class is recognized by the Department of Education. For the moment, that does not include coding boot camps. (You can search accredited schools here.)

This education tax credit of up to 20%, or $2,000, of the first $10,000 in tuition expenses that a student pays per year. The eligible $2,000 should cover the cost of tuition, books, and any equipment or supplies required by your school. When claiming the Lifetime Learning tax credit, it’s important to note that $10,000 is a collective figure and can’t be claimed per student if there is more than one on your filings.  

Qualifying expenses for this education tax credit only includes tuition and any other required fees to enroll. That means you can’t cover textbooks, housing, transport, supplies, etc. with this credit.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.