Are you still paying off your student loans? Read on and we’ll show you how you can reduce the amount you have to pay back.
I’m still paying off my student loan and it is not that fun.
Personally, having two different student loan companies hounding me for their money creates substantial stress.
Sure, I knew what I was getting into at the time and college was the best four years of my life.
I loved it.
But life goes on and making monthly payments can be challenging, especially in the economic climate we are currently living through.
Fortunately for us, there is a silver lining to the money that we spend to pay off our student loans when we are finally earning money in our first job.
The Student Loan Interest Deduction
The Internal Revenue Service graciously allows, as a deduction from your income, the lesser of $2,500 or, the actual amount of interest you pay on your student loans.
Better yet, you can take this deduction even if you do not itemize on Schedule A when you file your taxes. The amounts you pay in student loan interest is reported back to you on Form 1098-E by each lending agency so make sure you keep any and all 1098-E’s you receive as you will need them to take the deduction in April.
If you have no clue what the student loan interest deduction is, you’ve quite possibly missed out on one of the best adjustments to income that exists in the tax code today.
Since I took massive loans to go to a private college I will always get to deduct the full $2,500 because I pay such a high monthly amount. But, I can do so only as long as this particular adjustment to income continues to exist in its current form.
Sadly, less favorable rules are scheduled to take effect at the beginning of 2013 so make sure you take advantage of it this year. Promise?
Aside from beloved Congressional activities, the most common situation that will disqualify me or you from taking the full $2,500 deduction is if we start making too much money.
For single taxpayers in 2011, the deduction is reduced if your MAGI (Modified Adjusted Gross Income) is over $60,000 ($120,000 if married filing jointly) and it is gone if MAGI is over $75,000 ($150,000 if married filing jointly).
In my opinion, the MAGI phaseout for the student loan interest deduction is biased and would be better if there were no ceiling. If you think about it, any graduate who decides to be a doctor, lawyer, or any other profession that quickly earns more than $60,000 will not get the deduction. Sorry Doogie Howser.
How to know if you can claim the student loan deduction
Now that you’ve been introduced to the student loan interest deduction, you must know that you can claim the deduction only if all of the following apply:
- You paid interest on a qualified student loan in tax year 2011
- You are legally obligated to pay interest on a qualified student loan
- Your filing status is not married filing separately
- Your modified adjusted gross income is less than a specified amount which is set annually, and
- You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return
If those points apply to you, then congratulations - the student loan interest deduction can reduce your taxable income by up to $2,500 so you pay less tax.
There you have it: The student loan interest deduction.
Easy breezy right?
Give yourself a pat on the back because you are now paying less income tax to the government.
We hope you found this article useful! If you did, please share the article on Facebook and Twitter. And definitely put your email address in the form below for more tax-info awesomeness in your inbox. Finally if you have any questions feel free to email “connor” @TaxOnTaxOff.com