Posted by Global Accounting

What is the deduction of interest on loans for students?

What is the deduction of interest on loans for students?

The student interest deduction is a tax deduction of the interest paid on a post-secondary education loan during the fiscal year in the United States, the amount of the lowest deduction being $ 2,500 or the actual interest paid. The taxpayer may claim a deduction of interest on student loans if it has been paid only to cover the costs of qualified training.

How it works

The deduction interest of the student loan is above the line. This means that it is subtracted from the amended AGI (MAGI) not to tax the final payment. So, do not expect to receive a $ 2,500 rebate just because you qualify for a deduction. However, if the MAGI is, for example, $ 43,000, the deduction reduces the amount of income taxed to $ 40,500.

To take the deduction, four conditions must be met:

1. You have paid interest on an eligible loan (or loans)

2. The modified AGI is below the limit

3. You are not asked to be dependent on someone else

4. Do not store separately in a married warehouse

Breakdown of Student Loan Interest Deduction 

The Internal Revenue Service (IRS) offers tax deductions that can be used to reduce the taxable income of some taxpayers. For example, a person with a tax deduction of $ 3,500 may claim this amount in connection with his taxable income of $ 20,500. Your actual tax rate is $ 20,500 - $ 3,500 = $ 17,000 instead of $ 20,500. The group of students is a group of taxpayers who can lighten the burden of tax deductions. Some tax credits and deductions may require qualified students, including the deduction of interest on student loans. The student loan cannot be correlated or work according to a qualified employer plan.

Qualification for the deduction of interest on student loans

When a student can not apply for a student loan for tuition, the interest paid for the loan during the fiscal year may be a tax deductibility program deductible with a student loan. The loan must be qualified, which means, according to the IRS, that the loan must have been contracted by the taxpayer, spouse or employee. Also, the loan must have been obtained for educational purposes for a semester in which the student is enrolled, at least with reduced frequency in a university program. A qualified loan is one in which the taxpayer or his / her spouse is legally obliged to pay, and the loan must be used within a reasonable time before or after the withdrawal. The loan amount for the education expenses must be paid 90 days before the start of the academic period and 90 days after completion. In general, family loans or qualified employer plans are not qualified loans.

The loan must be used to cover eligible education expenses, including taxes, fees, books, classroom supplies, and equipment, etc. Accommodations and meals, student health insurance, insurance, and transportation are examples of costs that are not considered qualifying education expenditures in the student loan interest deduction program.

To qualify for the deduction of interest on student loans, the educational institution in which the student is enrolled must be an appropriate institution. An eligible school under IRS rules, including all accredited public, private non-profit and private institutions, eligible to participate in student support programs administered by the US Department of Education.

Eligibility and limitations

You can deduct up to $ 2,500 interest on a student loan each year (since 2018). If this amount is greater than the total amount minus the amount paid during the year, the total amount paid will be the deduction. A taxpayer who pays more than $ 600 for a student loan receives Form 1098-E from the credit institution. The form will bear the name, address and unique identification of the contributor. Since the deduction of interest on student loans is required as an income adjustment, it is not necessary to refer to the deductions in Table A of Form 1040.

The deduction of interest on student loans is limited by the taxpayer's income; the student loan cannot be deducted if the taxpayer's gross income exceeds $ 80,000 or if a joint declaration with the spouse is submitted, $ 160,000. A taxpayer who earns between $ 65,000 and $ 80,000, the deduction is low (eliminated) slowly until it reaches the maximum limit. This means that a single qualified taxpayer can deduct up to $ 2,500 if the minimum income is less than $ 65,000. This limit is reduced if it is between $ 65,000 and $ 80,000 because the income level is approaching the upper limit. This rule also applies to a married taxpayer with adjusted gross income between $ 130,000 and $ 160,000.

Using a simple example, you assume that a taxpayer with adjusted gross income is $ 72,000 and pays interest on the $ 900 student loan. He needs to know what has reduced the deduction.

And if you have a loan canceled?

Global debts are treated as taxable income by the IRS. Thus, if, for example, it has reached the end of his term in a payment plan based on income last year and the rest has been exonerated, he will be responsible for paying the tax on the amount announced.

However, the Public Lending Program (LFS) is an exception to this rule. If your debts (or your spouse or dependents) are remitted by the PSLF or due to death or permanent or total disability, you do not have to pay tax on the amount remitted.

If you receive a tax refund this year, be sure to assign at least some payments to your student loan. You pay in advance, even a small amount, you can save a lot of money during the loans.

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