Student Loan Tax Deduction and Tax Credit

Tax season is upon us. Whether you’re a student or parent, if you have been paying interest on your student loans, you should take the time to understand the different tax credits and student loan tax deductions available. You may be eligible for savings that could put real money back in your pocket.

Understanding student loan tax deductions can be a bit confusing, if not overwhelming. Luckily there are several online resources to help you make sense of it all. Here are some basics to get you started, but if you have any questions, it’s always best to consult with a tax professional.

The Difference Between Tax Credits and Deductions

When filing federal taxes, either online or with the help of a certified tax professional, the goal is to always pay your share but no more. This is where tax credits and deductions come into play for qualifying student loan expenses.

  • Tax credits: Reduce the amount of taxes paid by the tax filer— meaning, a larger tax refund or a reduced tax payment amount.
  • Tax deductions: Reduce the amount of taxable income—meaning it reduces the amount of the tax filer’s income that is taxed.

Here are some tax forms related to student loan tax credits and tax deductions that you may receive from your school or student loan lender.

  • Form 1098-T: A form generally received by the student from their school by January 31. This form will identify qualified tuition and related expenses payments you have made. If you receive this form, keep it with your other tax forms until you are ready to file your taxes.
  • Form 1098-E: If the tax filer has paid $600 or more in interest on a qualified student loan during the year, the filer will receive this form from the entity (likely the lender or servicer) to which the student loan interest was paid. If you receive this form, keep it with your other tax forms until you are ready to file your taxes.

Education-Related Tax Credits

There are two tax credits which allow a taxpayer to claim tuition and fees paid for education-related expenses. If you have made eligible payments, you should receive Form 1098-T from your school.

The American Opportunity Tax Credit provides a federal income tax credit of up to $2,500 per student, based on the first $4,000 in qualified expenses for tuition, fees, and course materials. And if the credit brings your tax obligation down to zero, you can have 40% (up to $1,000) of the remaining amount of the credit refunded to you. The tax credit is limited to the first four-years of postsecondary education, and the student must be enrolled at least on a half-time basis. Keep in mind, there are some adjusted gross income constraints which may limit the credit you can receive.

The second tax credit is the Lifetime Learning Credit which provides a federal income tax credit of up to $2,000 per taxpayer, based on the first $10,000 in qualified expenses for tuition and required fees. This credit is available for an unlimited number of years. The student does not need to be a candidate for a degree or certificate, and can be enrolled less than half-time. This is also a potential option if you’re taking courses to acquire or improve your job skills. Keep in mind, there are some Adjusted Gross Income constraints which may limit the credit you can receive.

NOTE: You need to determine if you are being claimed as a dependent. If you are being claimed as a dependent, only the person claiming you will be able to claim these credits. Also, there is no double dipping, only one tax credit (either Lifetime Learning or American Opportunity Tax) can be used for the same student in the same tax year.

Education-Related Tax Deductions

Student loan borrowers may deduct up to $2,500 in interest payments made on a qualified student loan on their federal income tax. This is known as the student loan interest deduction. For the loan to be considered a qualified education loan, the loan must have been borrowed by the taxpayer for the sole purpose of paying the qualified higher education expenses of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependent. Voluntary payment of interest does qualify for the student loan interest deduction, but only if the interest is paid by the borrower. For example, if your student loan was in deferment and you decided to make a payment of interest, this can be claimed.

If you have paid $600 or more in eligible loan interest, you will receive a 1098-E from your lender or servicer. If you are eligible to claim this deduction, there will also be some Adjusted Gross Income constraints which may limit your eligibility.

NOTE: It is important to determine if you can be claimed as a dependent on someone else’s federal tax return. If you can be claimed as a dependent, you will likely not be eligible to claim this deduction. In addition, the individual claiming you as a dependent will not be able to include your interest payments in their deduction.

What Next

Before you start your taxes, make sure you the necessary forms (like the 1098-T from your school, or the 1098-E from your lender or servicer) for these credits and deductions. And also double-check that the numbers on the forms are correct, if you think there is an issues you may need to contact your school or lender. If you have any specific questions or need further clarification, consult a tax professional.

Good luck with tax season this year!

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