As we are all eager to start saving for retirement, the fact that many people still have student loans is a topic that causes a lot of confusion in many households. Accordingly, anyone making student loan payments should wonder if their payments are tax-deductible. It makes sense since education is essential to your ability to earn a living and the tax laws should work in the students’ favor.
For many young adults, student loans are a tremendous burden. Even worse, many parents are straddled with student loan debt on behalf of their children. College costs are constantly on the rise and prices don’t seem like they’ll slow down anytime soon.
It doesn’t appear that you’ll avoid paying your student loans anytime soon. But as a taxpayer in the United States, you can get some tax burden relief on qualified student loans.
What Kind of Tax Benefit Can I Get by Paying My Student Loans Each Year?
Believe it or not, there are a number of different situations where you can deduct the interest paid on qualified student loans from your taxes during the tax year. But the deduction definitely has a limit. In fact, you are only allowed to receive a tax deduction based on $2500 worth of interest payments.
We’ll break this down using two specific examples:
- Example #1 – during 2019 you pay $3200 in interest toward your student loan. Because of the qualifying limit in place, you can only deduct $2500 in interest on your 2019 taxes. Even though you paid more than $2500, the limit is set at this amount and it doesn’t go any higher.
- Example #2 – during 2019 you pay $1800 in interest toward your student loan. Since you did not reach the $2500 upper interest threshold, you can deduct the entire $1800 interest payment from your taxes for tax year 2019.
As you are about to learn, there are other qualifying factors to determine if you can deduct interest paid to your student loan from your taxes. We touch upon them below.
How to Determine If I Am Eligible to Deduct Student Loan Interest on My Taxes
Unfortunately, not everyone is going to be eligible to deduct student loan interest on their taxes. But if you do qualify, this is definitely an excellent opportunity to lower your overall tax burden. The student loan interest deduction qualifications include:
- Within the tax year (we are currently in tax year 2019), you have paid interest on a student loan that is qualified for tax deductions.
- You have a legal obligation to make interest payments on a student loan that meets tax deduction qualifications.
- You do not fall under the status known as “married filing separately”. This status is an immediate disqualification.
- If you do file your taxes jointly with your spouse, no one else can claim you as a dependent on their tax return, or
- When you file as a single individual, your overall income is below $65,000 to qualify for the complete $2500 deductible. If you make $65,000-$80,000, your tax deduction limit is reduced. And if you make more than $80,000, you aren’t qualified for student loan interest tax deductions.
As you can see, not everyone is going to qualify for student loan interest tax deductions. But if you fit within these parameters, you should definitely deduct your interest payments from your tax return during the correct tax year.