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Student Loan Interest Deduction Usa – College was fun. Student loan payments—and the interest that comes with them—not so much. But this tax season, there may be a way to get back some of the money you paid in 2019 and put a little more cash in your pocket. That’s thanks to a special deduction designed to benefit 44 million student loan borrowers: the student loan interest deduction. This could potentially help you deduct up to $2,500 in interest paid on your student loans in 2019 – which could mean up to $550 in extra money for you if you’re in the 22% tax bracket
But before you plan for that extra cash, read on to learn more about how the deduction works and determine your eligibility. While this may not sound like fun, it can be very helpful when filing your taxes.
Student Loan Interest Deduction Usa
If you’re just starting out in your career, this federal tax cut, reinstated by the Taxpayer Relief Act of 1997 and maintained by the Tax Cuts and Jobs Act (TCJA), can be a big deal. you paid in 2019 – including both required and prepaid interest – on any of your qualifying student loans (federal and private loans), up to a maximum of $2,500. The term “subtraction” is fantastic. That said, the qualifying interest you pay (subject to a limit) can be deducted directly from your taxable income on your return.
Mortgage Interest Deduction Or Standard Deduction
What does that mean to you? This means you’ll pay less tax, which, depending on how much tax you paid in 2019, could give you a bigger refund… or reduce your debt if you can
This deduction is not something you have to report as an expense on your taxes. This is deducted from your taxable income. This means that if you qualify for the deduction, you can still deduct your qualifying student loan interest.
If you decide to take the standard deduction on your taxes. If that all sounds good, keep reading, because the amount you can deduct is affected by several important factors, including your income and your filing status.
Although the student loan interest deduction allows you to deduct up to $2,500 in student loan interest, you may not be able to deduct that amount.
Student Loan Repayments
The amount you can claim is subject to annual income, which can reduce — or eliminate — the amount of student loan interest you owe. The income limit is based on your modified adjusted gross income (MAGI).
MAGI is how the IRS determines your eligibility for certain deductions, including the student loan deduction. It is calculated by taking your adjusted gross income and adding tax-free interest income and certain deductions. These deductions can include student loan interest payments, deductions from IRA contributions, or foreign earnings.
For example, if your adjusted gross income is $50,000 and you pay $500 in student loan interest that you claimed as a deduction, your MAGI would be $50,500.
For the 2019 tax year (the taxes you file in 2020), the MAGI limit for a single filer increased to $70,000. So if your MAGI was $70,000 or less in 2019 and your tax filing status is single, you can probably deduct the amount.
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The amount of qualified student loan interest you pay, up to a maximum of $2,500. However, if it falls between $70,000+ and $85,000, you may qualify.
Although the maximum deduction amount of $2,500 has not changed since the 2018 tax year, income brackets have increased. The chart below highlights the differences between single households and married couples filing jointly.
Again, the deduction you qualify for will depend on your income (as shown in the MAGI chart) and filing status. It also depends on other qualifying factors (which we will discuss later). If you meet these requirements, you calculate the amount of your student loan deduction as shown in the examples below:
However, if your MAGI was more than $70,000 but less than $85,000, you would be eligible for a partial deduction. To calculate this, you need to use a formula. This is the formula:
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[Amount you paid in interest on student loans] x [(Your MAGI amount) – ($70,000)] / [$15,000]
Note: If you don’t want to deduct X yourself, you can use this handy student loan interest calculator to find out what interest you can potentially deduct.
A student loan interest deduction can be claimed by you (the student) or your parent(s) if they pay on your behalf as a dependent. But to qualify for the deduction, you must meet these requirements (courtesy of our friends at the IRS):
It’s important to note that the student loan interest deduction applies to both the interest you pay on qualified federal and private student loans, as well as graduate and undergraduate loans.
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When you file your 2019 taxes, you’ll need to provide supporting documentation about deductible student loan interest. If you paid $600 or more in interest, your loan servicer will automatically send you a Form 1098-E by January 31st to use when you file your taxes. Note that if you paid less than $600 in interest, you won’t get a form – but you can still deduct the interest. Your student loan servicer can provide you with the total amount of interest you have paid.
If you use TurboTax to prepare and file your taxes, you must have your 1098-E available. You will also have the option to include unreported interest on the 1098-E (amounts less than $600). If TurboTax determines that you qualify for the student loan interest deduction based on the information you provided, it will automatically add the amount to your required tax forms.
There’s no doubt: Student loan interest can add up. But even if you don’t qualify for the student loan interest deduction, you may be able to refinance and save on the interest you pay. To learn more about the Citizens Education Refinance Loan® and the benefits of refinancing, call 1-877-405-2262 to speak with one of our student loan specialists.
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2024 College Tuition Tax Deduction Questions & Answers
Disclaimer: The information contained herein is for informational purposes only and is not intended to constitute legal advice or a substitute for legal advice, advertising or solicitation. You should do your own research and/or contact your legal or tax advisor for help with questions you may have about the information contained herein. If you’re a recent graduate or college dropout, you might be surprised at how many students there are each month. Loan payments only go towards the interest portion of your loan. To understand why this is the case, you must first understand how this interest is accrued and how it is applied to each payment. You can do this yourself by calculating your student loan balances and payments. To calculate your student loan interest, calculate the daily interest rate, then determine your daily interest and then convert it to monthly interest. From there, you’ll have a better idea of what you’re paying each month.
Finding out how lenders charge interest for a given billing cycle is actually pretty easy. All you have to do is follow these three steps:
You first take the annual interest rate on your loan and divide it by 365 to determine the amount of interest that accrues each day.
Say you owe $10,000 on a loan at 5% annual interest. To get a daily interest rate of 0.000137, you need to divide this 5% rate by 365: 0.05 ÷ 365 = 0.000137.
Annotated Starter Checklist: Student Loans
Then multiply your daily interest rate in step 1 by your outstanding principal. Let’s use the $10,000 example again for this calculation: 0.000137 x $10,000 = $1.37
That $1.37 is the interest you accrue each day, meaning you will be charged $1.37 in interest each day.
Finally, you need to multiply the daily interest amount by the number of days in your billing cycle. In this case, we’ll assume a 30-day cycle, so the interest you’ll pay each month is $41.10 ($1.37 x 30). The total for one year would be $493.20.
Interest starts accruing once your loan is paid off, unless you have a subsidized federal loan. In this case, you will not be charged interest until the end of the grace period, which is six months after you leave school.
The Student Loan Interest Deduction
With unsubsidized loans, you can choose to pay off any accrued interest while you’re in school. Otherwise, accrued interest is capitalized, or added to the principal, after graduation.
If you request and receive forbearance—essentially, suspending your loan payments, usually for about 12 months—keep in mind that while you can stop payments during forbearance, interest will continue to accrue during this period.
