The Tax Bleep: Student Edition (Part 2)

Welcome back! A few days ago we discussed the basics of the credits and deductions you can receive for paying tuition for higher education. See The Tax Bleep: Student Edition (Part 1)  if you didn’t catch it! Today we are going to fast forward 4 years (or 7 depending on how much fun you’re having) and find out how paying back those student loans can affect your tax return. No one likes the thought of paying back loans until it is fully paid off and the weight is lifted. Looking at a $40,000 loan statement can suck the life out of you when trying to calculate how many years it will take to pay off and how much interest you will end up paying in the process. However, you must start paying them off eventually (6 months after you’ve graduated, to be exact) so it is nice to know that you can earn a tax deduction for all that interest you are paying.

There are a few basic things to know about the student loan interest deduction.

1. Qualified Student Loan: In order to get a student loan interest deduction, your loan must have been taken out solely to pay for school expenses. The loan cannot be a loan from a relative or an employer loan, even if you used those loans only to pay for school. Additionally, the loan must have been incurred for you, your spouse, or your dependent, so pretty much any person you claim on your tax return. If you did pay student loan interest, you may receive a 1098-E.

2. 1098-E: If you paid student loan interest during the year exceeding $600, you will receive Form 1098-E. This form will show you how much interest you paid on your student loan during the calendar year. If you did not pay more than $600 in interest, you may still be able to deduct all or a portion of that interest if you keep track of it on your own. You can do this by looking at your monthly statements to see how much your principal decreased, or you could also call your loan company.

3. Deduction Limits – Single, Head of Household, Qualifying Widow(er): If your filing status is single, head of household, or qualifying widow(er) and your adjusted gross income (AGI) is more than $80,000, you cannot take a student loan interest deduction. If your AGI is less than $65,000, you can deduct all of your student loan interest paid UP TO $2,500. You cannot deduct more than $2,500 in student loan interest. If you made between $65,000 and $80,000, your deduction phases out. Check out the student loan interest worksheet to see how much interest you can deduct!

4. Deduction Limits – Married Filing Jointly: If your status is married filing jointly and your AGI is more than $160,000, you cannot take a student loan interest deduction. If your AGI is less than $130,000, you can deduct all of your student loan interest UP TO $2,500. If your AGI is between $130,000 and $160,000, your deduction phases out. The student loan interest worksheet can help you figure your student loan interest deduction!

5. Miscellaneous: In order to qualify for this deduction, there are a few other stipulations. If any of the following are true, you cannot claim a student loan interest deduction: your status is married filing separately, you are claimed on another person’s return, and you were not legally obligated to pay interest on your loan. The deduction is an “above the line” deduction which means it reduces the amount of taxable income you have.

I know this won’t completely lessen the blow of having to pay off that massive student loan, but it is a start! And when it comes to paying taxes, I want you to save as many of those hard-earned dollars as you possibly can! Follow me on twitter for more of your tax return updates!

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The Tax Bleep: Student Edition (Part 1)

Well, the spring semester is well underway for all of us studious folks. Whether you are an undergrad, graduate (like me!), medical or any other type of student on the road to higher education, you are most likely becoming smarter and more stressed as the semester progresses. You (or your parents) are also likely to be paying a few pretty pennies in order to get that shiny degree. If this is the case, you not only earn that shiny degree, but you could possibly pay less tax to the government! Woo-hoo! Before you get too excited though, remember that anything involving taxes and the government almost always involves stipulations and restrictions. You thought you were getting off easy, huh?

The first thing you need to know about is Form 1098-T. This is a form that your school will send to you that shows how much you have paid for secondary education throughout the calendar year. If you go to two or more schools you will receive multiple forms. Be sure you have all your forms before you submit your tax return! If you are a dependent, which means your parents claim you on their tax return because they financially support you, you cannot claim your tuition deduction. Your parents will claim the deduction. There are a few different options available for tax savings when you have paid for higher education.

An education deduction you can claim is the Tuition and Fees Deduction. This deduction reduces your adjusted gross income. Your adjusted gross income (AGI) is the amount of income you have earned throughout the year (W-2’s, interest income, etc.) less various deductions. This type of a deduction eventually leads to a reduction in your taxable income. If you are married and you and your spouse have a combined income of less than $160,000, you may be able to deduct a portion of your tuition and fees. If you are not married and your income is less than $80,000, you may get a deduction. The maximum tuition and fees deduction you can receive is $4,000. You may not get the full $4,000 deduction if it is limited by your income and other deductions you have received. To find out your tuition and fees deduction, plug in the appropriate numbers to Form 8917, which is titled “Tuition and Fees Deduction”, and read the instructions.

Tip #1: If you are ever confused about anything to do with your tax return, and you do not want to hire a CPA to do the dirty work for you, ALWAYS READ THE INSTRUCTIONS. Reading the instructions for forms that you have to file can clarify exactly what the IRS wants. If you do not know what form you need, there is an easy answer for that: Google it! 

The American Opportunity Credit and the Lifetime Learning Credit are two different credits that may be claimed when you have paid higher education tuition. The maximum American Opportunity Credit that can be claimed is $2,500 per student, and the maximum Lifetime Learning Credit is $2,000 per return. The American Opportunity Credit is only available for the first four years of secondary education while the other credit is available for all years of secondary education. There are various other restrictions regarding these credits such as your AGI (we talked about that earlier!), student enrollment status, etc. An easy way to see way to see how much you can deduct is to look at the instructions for Form 8863. Form 8863 is what you file with your return to show how much of either credit you will be claiming.

Tip #2: This may all seem overwhelming at first, and to be honest, it does not get any easier. Tax law is constantly changing, and there is no way to know the answer to every single tax issue off the top of your head. If you do have a more complex return, and you are not a tax professional yourself, I highly suggest hiring a CPA in order to give you the highest tax savings possible. 

The Tuition and Fees Deduction is good route if you do not qualify for either of the credits. If you can claim an education credit, it is usually more beneficial than claiming a deduction because the credit directly reduces the tax that you owe. The deduction only reduces the amount of income that is taxed. However, no two returns are the same so this will not always be correct.

If you claim the Tuition and Fees Deduction, you CANNOT claim either credit and vice-versa. Education deductions and credits are a very common tax subject because so many people are paying for or have paid for secondary education. Form 8863 and Form 8917 are just the tip of the iceberg. There are endless other areas that can alter the credit or deduction you receive. It is best to know the basics, and with that as a starting point, you can delve into further areas that might affect those credits or deductions.

Stay tuned for The Tax Bleep: Student Edition (Part 2) to learn how paying back student loans can affect your tax return. Please comment or send an email if you need tax assistance!

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