For the last installment of the Student Loan Series, we’re going to be talking about the tax consequences of student loans. Previously we covered whether college is worth the cost, the different types of student loans, and repayment options.
There are several tax advantages of college students, and we’ll look at a few of them here:
Student Loan Interest:
The most common tax advantage of student loans comes in the form of student loan interest being tax deductible. You can write off up to $2,500 of annual student loan interest charges. This advantage phases out when your modified adjusted gross income (MAGI) is between $60,000 and $75,000 for single filers and between $120,000 and $150,000 for joint filers.
The $4,000 Deduction (or $2,000):
You may deduct up to $4,000 of college tuition and fees for anyone on your tax return. There is no need to itemize, but regardless of how many students are in your family, $4,000 is the annual maximum.
In order to qualify, your MAGI must be below $65,000 for single filers, $130,000 for joint filters. Single filers whose MAGI is between $65,001 and $80,000 and join filters whose MAGI is between $130,001 and $160,000 are entitled to a $2,000 reduction.
In addition, no deduction is allowed for a person who can be claimed as a dependent by someone else. You are not eligible if you are married and filing separately.
The American Opportunity Credit:
You may claim the first $2,000 of a college student’s annual tuition and fees plus 25% of the next $2,000 for a maximum of $2,500 per student. This credit can be claimed for four tax years for any student. The credit is phased out between AGI of $80,000 to $90,000 for single filers and between AGI of $160,000 and $180,000 for joint filers.
The Lifetime Learning Credit:
This is similar to the American Opportunity Tax Credit, but the number of years you can claim it is unlimited. The credit is 20% of tuition and fees up to $10,000, for a maximum annual credit of $2,000. The credit is phased out between AGI of $50,000 to $60,000 for single filers and between AGI of $100,000 and $120,000 for joint filers.
Tax-Free Employer Education Reimbursements:
If your employer reimburses you for classes you take, up to $5,250 of that income is tax free. This includes graduate-level courses. Dependents don’t count, but there are no maximum income limits.
With all of these deductions, your tax bill is now lowered by the amount of the deduction. Rather, your tax liability is lowered. So you pay taxes on less of your income. For example, someone making $55,000 per year and writing off $2,500 in student loan interest would now have a tax liability of $52,500. Assuming they are in the 25% tax bracket, they would be saving $625 ($2,500 x .25).
While these deductions will not cover even a significant portion of the student loans, they do make it a little easier to handle it all. I encourage everyone to look at these tax breaks and save a little money each year.
Readers, which student loan tax deductions are you taking advantage of?