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How can I get to know about Student Loan Interest Deduction
How to Use the Student Loan Interest Deduction
If you've got student loan debt, chances are you're asking questions like, "Is student loan interest deductible?" because your debt has grown so fast you feel like you’re stuck in the twilight zone. Like that gym you joined on January 1 of 2015, in that city you moved away from two years ago, but still get charged a monthly membership fee for. You might be struggling to cancel that membership, but there are a few things you can easily to lessen the burden of your student debt.
There are two options available for reducing the total amount paid in tax on student loans. One option comes in the form of interest deductions on loans and the other as tax credits which are deducted from the total tax you owe. Interest deductions are typically calculated based on percentages. Both options come with similar eligibility requirements as well as income caps and phase-out brackets. We’ve got the details outlined and broken down for you, so you can make the best decision for your situation and confidently save as much as possible!
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What is student loan interest?
In case you need a refresher, you can think of interest as just a percentage of the total amount of your loan that you pay annually. Let’s call it the cost of borrowing. So student loan interest is the annual amount you’ll have to pay on top of your total loan. It was probably outlined in the small print that you didn't have the patience to read when you were 18.
Now that you’re all grown up and independent, let’s walk you through how you can maximize your student loan interest deduction and benefit from student loan tax deductions so you can save some money when paying self-employment taxes and keep that independence!
Is student loan interest deductible?
Short answer: Yes!
As long as you meet certain criteria outlined by the IRS, you’re eligible for up to $2,500 in deductions based on the total interest you’d pay during the previous year.
To make sure you’re eligible, calculate your MAGI (modified adjusted gross income), as the IRS limits deductions for those with higher incomes. For 2024, if you’re single or the breadwinner of your household, that range is from $80,000-$95,000 and $165,000-$195,000 for joint filers.
If you know your MAGI, you can use FlyFin’s easy tools to break that down and see it quarterly to match how you pay your federal income tax.
Other IRS requirements are there just to make sure your student loan meets a few qualifications:
- You took out the loan for the school you studied at.
- You did in fact study at that school.
- You didn’t spend the loan on non-education expenses.
Tax credits you can claim on top of the student loan interest deduction
Student loan interest deductions are not the only higher-education-related ways to save on your taxes. Education tax credits, which are available to you regardless of your deductions, are even better than deductions. Instead of lowering your taxable income, they directly lower the amount of tax you owe. The Lifetime Learning Credit, for example, lets you subtract up to $2,000 worth of school-related expenses from your income tax at the end of the year.
The same goes for college savings plans. If you’ve got kids in K-12, up to $10,000 of your contributions to their college savings plans can be taken off your income tax, and a further lifetime maximum of up to $10,000 in credits can be had on tax return loans for qualified student loan debts. There’s also the American Opportunity Tax Credit, where you can get a tax credit of up to $2,500 on expenses paid during the first four years of education after high school.
There are also tax credits unrelated to education that you might be eligible for, depending on your situation. If you have kids or other dependents, you can offset care costs through Child Tax credits and Dependent Care credits. If your little one lives with you more than half the year and is under 18, you’re eligible to claim the Child Tax credit. The Dependent Care credit can be claimed for both specific childcare costs and costs for the care of an adult dependent or a temporarily incapacitated or disabled spouse.
Quick tip
If you're thinking of starting a family, or are already raising America's next generation, you can save money in a 529 plan and pay no capital gains tax when you make withdrawals to pay for your kid's college tuition.
What about student loan forgiveness and the payment pause?
Loan forgiveness, the elusive white whale of the student loan world.
The current COVID-19 student loan payment pause is set to expire either 60 days after its extension through June 30 of 2023, or 60 days after the successful implementation of the student loan forgiveness plan (which is blocked in court right now, so this may go on for a while). When it happens, you'll be asking, "Is student loan forgiveness taxable?" but in this case, too, it's only the interest that's deductible. This means there's no such thing as a student loan forgiveness tax.
There are also questions flying around about refunds during the payment pause and whether they will be affected. Even though payment is paused, your loans still accrue interest, and you can deduct that from your taxable income, so your tax refund should reflect that.
The pause means that during this time, all student loan payments are paused. If you have student loans, you don’t need to make any repayments on loans or interest, and you aren’t accruing more interest. So no need to worry about claiming deductions or eligibility for refunds during the payment pause. The pause on federal student loan payments means that you may not have interest payments to deduct for any federal student loans until it ends.
Furthermore, President Biden's made all forms of student loan forgiveness from the beginning of 2021 tax-free until the end of 2025. So is student loan forgiveness taxable? Nope, not yet. Fingers crossed we ever have to check that one again!
What’s FlyFin?
FlyFin's A.I.-enabled automatic deduction tracker finds all qualifying deductions using your bank statements and can quickly pinpoint dental expenses.
It deals with the tax needs of gig workers, freelancers, independent contractors and sole proprietors. But anyone can file taxes through FlyFin!
FlyFin tracks all your business expenses automatically using A.I. to find every possible tax deduction.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes.
Download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and more money on your taxes than last year, guaranteed.
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