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Claiming your student loan interest deduction & other 2019 student loan tax tips

Mediafeed logo Mediafeed 3/18/2019 Melanie Lockert
a person sitting on a sofa: Woman Filing Taxes © Woman Filing Taxes

It’s that time of year again… tax time! Whether you like it or not, April 15 is inching closer, and knowing how to handle student loans on your tax forms can help you save money.

Student loans and taxes — two of your favorite things, right? OK, we know both can be confusing and frustrating. But here are the facts you should know to help you make sense of it all during tax time.

1. Are student loans tax deductible?

Man sitting on floor in living room and calculating bills © Tetra Images/Getty Images Man sitting on floor in living room and calculating bills

While many people might be eligible for the student loan interest deduction, it’s important to know that only the interest (not the entire payment) is deductible up to $2,500. Claiming this deduction could take hundreds of dollars off your tax bill.

2. Credit card interest could be tax deductible too

Credit cards protruding from wallet. © Michele Constantini/Getty Images Credit cards protruding from wallet.

Interest charges on your wallet’s plastic could also be deductible if used toward qualified education expenses. The catch: Unless every item charged to the card is exclusively for qualified expenses, you can’t write it off at all.

“Even a single non-qualified purchase on the card makes all the interest non-deductible,” said Eric J. Nisall, founder of AccountLancer.

3. Student loan help through your job

Woman calculating receipts for taxes © Tooga/Getty Images Woman calculating receipts for taxes

If your employer helps pay off your student loans, it could be considered income and subject to payroll taxes.

If your employer has treated loan payment matching like 401(k) contributions, however, you could be off the hook. If you’re unsure, consult your human resources department.

4. What about gifts from family?

Mother and daughter baking in kitchen © Hero Images/Getty Images Mother and daughter baking in kitchen

If you get the deal of a lifetime and your parents or another relative pay off your student loans, it will be considered a non-taxable gift. However, your benefactor might need to file a gift tax return and pay taxes on the total gifted.

5. Tax implications of default

​Man Looking Unhappy While Filling Out His U.S. 1040 Tax Form and looking at Tax Instruction Book. © flickr Editorial/Getty Images​ ​Man Looking Unhappy While Filling Out His U.S. 1040 Tax Form and looking at Tax Instruction Book.

If you stop making payments and default on your student loans, Uncle Sam could intervene and garnish your tax refund until your debt is paid off. Other federal payments, including for Social Security benefits, would also be at risk in cases of default.

How to deduct student loan interest

Concerned man with laptop looking down at paperwork in armchair © Echo/Getty Images Concerned man with laptop looking down at paperwork in armchair

Student loans are a drag, but as mentioned above, you can at least write off some of the interest.

According to the IRS, you can claim this student loan tax deduction if all of the following apply:

  • You paid interest on a qualified student loan during the tax year for which you are filing
  • 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 (MAGI) is less than a specified amount, which is set annually
  • You or your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return

To qualify for the full interest deduction on your taxes, your MAGI must be less than $80,000 ($160,000 for couples filing jointly).

Both federal and private student loans qualify for this deduction. If you paid at least $600 in interest (which isn’t hard to do, sadly), be on the lookout for student loan tax form 1098-E from your loan servicer. Form 1098-E illustrates how much interest you paid throughout the tax year. You’ll input that amount onto your main tax form, 1040.

You can make the process even easier by using a service like TurboTax or TaxACT, or by seeking help from a tax professional.

Something to note is that only you, as the borrower, can deduct the student loan interest on your taxes. Even if your parents helped you out with some student loan payments, they are not eligible for this student loan tax deduction.

“Only the person who is legally obligated for paying the debt is allowed to claim the deduction,” AccountLancer’s Nisall said, even if the student loan borrower is claimed as a dependent by their parents.

Refinancing and the student loan tax deduction

Past Due Student Loan Statement and Paperwork © Kirby Hamilton/Getty Images Past Due Student Loan Statement and Paperwork

Student loan refinancing is one of the best ways you can consolidate your loans into one monthly payment and potentially get a lower interest rate, too.

If you choose to refinance your student loans, you may wonder if your new student loan interest is still eligible for tax deductions.

The verdict? Most likely.

“As long as the money from the loan was used for qualified education purposes, interest paid on refinanced loans is eligible for deduction,” Nisall said.

But if you refinance more than the original value of your student loans, it’s probably not do-able.

“If a loan was refinanced for more than the original value, and the additional money wasn’t used for qualified education expenses, none of that interest is deductible,” Nisall said.

As you can see, there are many nuances to student loans and taxes. When in doubt, talk to a tax professional about your situation to see if you’re eligible for any deductions or credits.

Prepare your paperwork, including your 1098-E (typically available by Jan. 31), and get your taxes over and done with promptly. Who knows, you might even receive a refund, which you can use to improve your credit and make an extra student loan payment.

Either way, starting early and being organized can make tax season a lot less hectic and stressful.

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