Those two things can also make a nice pair — sort of a “two negatives make a positive” thing. That’s because any interest you pay on a qualified education loan is tax deductible up to $2,500. Sure, a tax deduction doesn’t really make up for the home you might have bought or the money you could have saved had it not been for the crushing cost of your education, but it helps a little bit, right?
Beyond actually paying interest on a qualified education loan (which pretty much includes any student loan used for expenses like tuition and fees, room and board, transportation, books and other expenses related to your education), there are basically two things you need to know in order to claim the deduction. First, only one person or married couple filing jointly can claim it, and second, you can’t make a ton of money.
Talk to Your Parents
The most common mistake student loan borrowers make when trying to claim the student loan interest deduction is not knowing that only one person can do so, said Lisa Greene-Lewis, a tax expert and CPA for TurboTax. This problem tends to come up with recent graduates and their parents, especially as the borrower starts to establish independence, moving out on their own and filing their own taxes.
“Parents may have been claiming them as a dependent and taking that deduction or claiming that education credit,” Greene-Lewis said. “The parents and the student need to communicate. Only one person can claim that, and it’s the person that claims the exemption for the dependent.”
Check Your Pay Stub
There’s a cap on how much you can earn while claiming the student loan interest deduction. The deduction phases out as your modified adjusted gross income increases, going away if your income exceeds the limits. An individual with a modified adjusted gross income of more than $80,000 and a married couple filing jointly earning more than $160,000 cannot take the deduction.
“Starting out, it’s nice,” said Bill Farmer, an enrolled agent in Lexington, Ky., “but if you actually start making any real money, you don’t get it.” Farmer said a lot of people make the mistake of not realizing they earn too much to claim the deduction, so they take it when they shouldn’t. That could result in owing more than you thought you would, receiving less of a refund than you anticipated or running into trouble with the IRS if you file with the error and are audited. (Working with tax software or a tax professional can also help you avoid that problem.) Keep in mind you can amend a tax return after you’ve filed it if you realize you’ve made a mistake.
Figuring out how much you paid in student loan interest should be easy: Your student loan servicer should provide you with a 1098-E stating that figure. If you didn’t get it in the mail, check your online account or contact your servicer. Taking advantage of the deduction can help you reduce your tax liability or increase your tax refund, so it’s worth your time to see if you qualify for it.
And don’t forget, your student loan payments also impact your credit score. If you want to see how, you can get a copy of your free annual credit reports from each of the major credit bureaus. You also can also check your credit scores for free each month on Credit.com.
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