Tax time can be a time of frustration and confusion for a lot of people. If you are filing your taxes, you may need to do a lot of reading and digging through dense material to understand what deductions or tax credits you may qualify for.
In this article, we discuss the student loan interest tax deduction, how you can find the information for calculating this deduction on your Form 1098-E, and all the details in between.
Difference Between Tax Credits and Tax Deductions
Before getting into the details of how student loans affect your taxes, it’s important to distinguish between two types of tax benefits: the tax credit and the tax deduction.
A tax credit is money taken directly off your tax burden. In other words, if you owe $5,000 in taxes, but get a tax credit of $500, you only owe $4,500. In some cases, if a tax credit is for more than what you owe, it might be all or partially refundable, meaning you are given the difference.
For example, if you are due a tax credit of $500, but you only owe $300 in taxes, then if the credit is refundable, you will not have to pay taxes, and you will be given $200 back. If the credit is nonrefundable, however, you will have the $300 tax burden eliminated with no money given back.
A tax deduction is an amount you can subtract from your total income so that you don’t have to pay taxes on it. So, if you have a $500 tax deduction, that $500 is subtracted from the total income that you earned before taxes are calculated. If taxes had been 20% on that $500, for example, this would mean a savings of $100.
In general, tax credits are usually worth a lot more in savings than tax deductions. When it comes to paying for your education, some tax credits available are the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC). Deductions, on the other hand, include things like the student loan interest tax deduction.
What Is a 1098-E?
Form 1098-E is your Student Loan Interest Statement. It will include information about your student loan lender, name and address, and the amount of student loan interest the lender received from you during the tax year.
When it comes time to file your taxes, you will use this information if you are eligible to claim a student loan interest tax deduction. It’s important to note that the amount of interest paid shown on your 1098-E is not necessarily the amount of your deduction. The amount you can claim for the deduction depends on your income and is subject to a cap, as discussed in a later section.
How Do I Get a 1098-E?
If you paid $600 or more in student loan interest to a lender or loan servicer, then they are required to send you Form 1098-E in the mail before the end of January following the associated tax year.
In some cases, you may have more than one loan servicer, especially if your loan changed hands during the year. In that case, you can expect to receive a 1098-E from each servicer.
If you do not receive a 1098-E in the mail, you should be able to access the same information by logging into your loan servicer’s website. You may also choose to call or otherwise contact the servicer to ask why you never received the form. Note that you should receive a 1098-E from any company servicing your federal student loans or any private student loan lender you paid interest to.
If you do not know who your loan servicer is, you can find this information for federal loans by logging into the Federal Student Aid (FSA) website. If you do not know who your private student loan lender is, you may need to get a copy of your credit report.
If you paid less than $600 in student loan interest, you might not receive Form 1098-E. However, you are still entitled to deduct this interest on your taxes. You will have to look up your interest amount with your loan servicer instead.
All About the Student Loan Interest Tax Deduction
All of the following forms of student loan interest paid during the tax year may potentially be deducted on your taxes:
- Interest paid on federal student loans
- Interest paid on private student loans
- Loan origination fees
- Capitalized interest
The amount of the deduction is the lesser of $2,500 or the total amount of interest paid. In other words, if you paid $5,000 in interest, you can only deduct $2,500 of it. If you paid $1,000 in interest, you could deduct $1,000 but no more.
The amount you can deduct is also subject to an income cap. This means that if you make too much money, you may not be able to deduct as much if any at all. Anyone with a modified adjusted gross income (MAGI) of under $70,000 if filing single or $140,000 if filing a joint return may take the maximum possible deduction for their student loan interest. For most taxpayers, your MAGI is your adjusted gross income before subtracting your student loan interest.
If your MAGI is more than $70,000 but less than $85,000 (more than $140,000 but less than $170,000 if filing jointly), you can still receive a partial loan interest deduction subject to a proportional phaseout. The amount you can deduct is calculated as follows:
- Take the difference between your MAGI and $70,000 ($140,000 if filing jointly)
- Divide the result by $15,000 ($30,000 if filing jointly)
- Multiply the resulting fraction by the amount the deduction would be if you made under the income limits.
To make life simple, the IRS has an interactive tool on their website that you can use to determine if you qualify for a student loan interest tax deduction. There is also a student loan interest deduction worksheet in your tax forms that allows you to follow step-by-step instructions to determine the amount of your deduction.
To claim the deduction, you will enter the allowed amount calculated from the worksheet on Schedule 1, line 20 of the IRS Form 1040. (Where this deduction is entered on other tax forms may vary but will be included in the instructions for that form.)
You do not need to send Form 1098-E in with your taxes. It is primarily for your information so that you can enter the correct information when filing. However, it is advisable to keep all tax-related forms together with a copy of your taxes so that you can refer to them or present them in the event of an audit.
Difference Between 1098-E and 1098-T
Depending on your current education situation, you may receive both Forms 1098-E and 1098-T in the mail at tax time. With names so similar, you want to make sure you keep track of the difference between these two forms.
As described above, Form 1098-E displays your student loan interest paid during the year. Form 1098-T, on the other hand, is a tuition statement and includes the amounts you may have paid to an educational institution for qualified tuition and education expenses.
Form 1098-E is used to determine your student loan interest tax deduction, while Form 1098-T can be used to determine any education credits you may qualify for, as well as additional deductions for education expenses.
Stay Informed About Student Loans
At CollegeFinance.com, our goal is to provide you with accurate information and data so that you can make informed financial decisions about your education.
When it comes to paying tuition and paying student loans, there are many tax benefits to be aware of, including the AOTC, the LLC, and the student loan interest tax deduction discussed in this article.
For more information about financing your education, visit the resources on our website, and consider signing up for our newsletter to get updates in your inbox.