Are Student Loans Tax Deductible?

Student loans and taxes: benefits, deductions & credits

Many people are unaware that the federal government offers tax benefits for education-related expenses. Deducting student loan interest at tax time may lead to significant savings depending on your individual situation. Generally, tax deductions and credits apply to taxpayers who are repaying qualified student loans or currently paying for post-secondary education.

The IRS only allows for deductions and credits on qualified education loans – that is, a loan that is taken out to pay exclusively for higher education. This includes both federal and private student loans, so it is important to keep organized records to take advantage of these tax benefits.

Rules, benefits, credits, restrictions and deductions can change from year to year, so it is also important to consult a certified tax professional* for information about student loans and taxes, as well as how changes in loan status (such as student loan consolidation) may affect your eligibility for certain tax credits.

Determine which tax credits and deductions you’re eligible for

Can you deduct student loan interest or earn a tax credit on this year’s tax return? That depends on whether your situation qualifies for a deduction. As of 2014, tax deductions and credits include:

  • Student loan interest deduction.
  • Tuition and fees deduction.
  • The American Opportunity Credit.
  • The Lifetime Learning Credit.

The IRS website hosts an information center that gives taxpayers a detailed overview of the above, as well as other tax credits and deductions. However, it is still important to speak with a tax professional who can tell you which deductions and credits would apply to you.

Deducting tuition and fees

As long as you document what you paid each year, a deduction for both tuition and fees can be claimed when filing income taxes, and it may help you reduce your taxable income by up to $4,000 per year. Generally, you can claim this deduction if all of the following requirements are met:

  • Your filing status is any filing status other than married filing separately.
  • You pay qualified education expenses of higher education for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.
  • Another person cannot claim an exemption for you as a dependent on his or her tax return.

Deducting student loan interest

If you’ve paid for any part of your education with student loans, you may be wondering which, and how much, of your student loans are tax deductible. You can deduct student loan interest on both unconsolidated and consolidated student loans, whether they are federal or private loans. However, to be eligible, the original loan must have been borrowed while the student was enrolled at least half-time in a program leading to a degree, certificate or other recognized educational credential.

One of the benefits of deducting student loan interest is that it reduces the amount of your income subject to federal income tax. If you have a Modified Adjusted Gross Income (MAGI) less than $75,000 (or less than $150,000 if filing a joint return), you may be qualified for a deduction of up to $2,500 a year. Generally, you can claim this deduction if all four of the following requirements are met:

  • Your filing status is any filing status other than married filing separately.
  • No one else is claiming an exemption for you on his or her tax return.
  • You paid interest on a qualified student loan.
  • You are legally obligated to pay interest on a qualified student loan.

It is important to keep in mind that student loan tax deductions cannot be combined with an education tax credit. However, you are able to choose whichever option lowers your tax bill the most. Learn more about student loans and tax credits below and consult your tax professional in order to save the most money.

Understanding student loans and tax credits

When researching student loans and taxes, it’s well worth your time to seek out any tax credits that may be available to current students. Unlike deductions, tax credits reduce the amount of taxes you have to pay – which could mean bigger savings. However, tax credits may not be available to you after graduation, as they are usually meant to help offset the cost of higher education while you are still going to school.

Tax credits can change or expire from year to year, so it’s important to research which credits are available at any given time. As of 2014, the two main education tax credits are:

  • The American Opportunity Credit. This allows many borrowers to qualify for tax credits up to $2,500 per student, and has been extended through 2017 as part of the American Taxpayer Relief Act of 2012. A modification of the Hope credit, the American Opportunity Credit allows students to claim credit for tuition and required course materials for up to four years of college. It is available to those with a modified adjusted gross income of $80,000 or less ($160,000 or less for married couples filing jointly).
  • The Lifetime Learning Credit. Unlike the American Opportunity Credit, the Lifetime Learning Credit can be claimed for an unlimited number of years. However, it only offers a maximum annual credit of $2,000 per student, per tax year, and can only be claimed by those with “qualified education expenses.” It also cannot be claimed in tandem with the American Opportunity Credit, so it is important to consult with a tax professional who can examine your student loans and taxes and determine which credit would be best for your situation.

Student loans and taxes: graduation and beyond

Upon graduation, both your tax status and your student loan status may change. This may mean that you are no longer eligible for certain tax deductions or tax credits, so it is important to consult a tax professional to discuss your options. Depending on their advice, you may wish to consider student loan consolidation as a means of both managing payments and reaping current or future tax benefits. Citizens Bank can help you consolidate private student loans or refinance a single student loan. Tax deductions and credits are always changing, so be sure to speak with your financial advisor before making any decisions regarding federal or private loans.

* This content is intended to provide general information on higher education tax benefits. It is not to be used as tax advice and should not be relied upon in the preparation of a tax return. IRS rules and policy nuances may be complex in some areas. Taxpayers should consult with a competent tax advisor or the IRS to determine how their own circumstances are affected. Citizens Bank is a brand name of Citizens Financial Group, N.A. and Citizens Bank of Pennsylvania.

 
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