Come tax time, you’re likely looking at all the ways you can reduce your taxable income to get the largest return possible. This is especially true for you if you’re a young professional that is in the very early stages of your career, perhaps even only a year or two out of college. It’s likely that you’re repaying some sort of debt during these early years and living frugally as you try to make a name for yourself in the workforce.
With that being noted, a common question is whether student loans are tax deductible. The answer is both “yes” and “no.”
They are tax deductible in that you can deduct any interest that is accrued on your tax return, which can be several thousand dollars per year. However, in most cases, the amount that you can deduct is capped at $2,500. That’s the “yes” part of the scenario, as you’ll likely receive a 1098-E form from your lender at the start of the new year. But at the same time, you have to qualify and meet certain requirements in order to be able to write off these interest amounts, so not everyone is eligible to claim their student loan interest as a tax deduction.
For instance, here are some of the reasons why you may not be able to write off student loan interest:
- You’re married, but file separately.
- You (or your spouse) can be claimed as a dependent on someone else’s tax return.
- Your income is more than the adjusted gross limit, for either individual filing (typically between $60,000 and $70,000) or joint filing (typically between $120,000 and $150,000). Adjusted gross limits are recalculated annually.
It should be noted that the vast majority of young professionals do qualify to use student loan interest as a deduction. This is because married couples are likely to file jointly for tax benefits. Also, if someone is making more than the adjusted gross limit permits to use student loan interest as a deduction, there’s a good chance they’ve already paid off their student loans or don’t exactly need the deduction, so to speak.
Finally, there’s one more stipulation you have to meet in order to ensure that your student loan interest is legally tax deductible and that involves all student loan money having gone toward education related expenses. What exactly does this mean? It’s simple – when you applied and qualified for your student loans, you likely received a check near the beginning of each semester to use toward tuition, books, etc. So if you received a check of $5,000, for instance, and used $2,000 on new clothes or suits for a future job interview, the interest you paid on that amount is not eligible for a tax deduction – it has to be education related.
Now that you know that it is possible to write off student loan interest as a tax deduction, you should be seeing whether or not you qualify based on the above information. If you do qualify, then look for that 1098-E form to come in the mail sometime in January and include it with your tax return.