As students start their college life, student loans are often easily accessible. This can either help or hurt during tax time.
Impact of Student Loans on Your Taxes
Taxpayers are paying a lot for their higher education. According to reports, $30,000 is the average student loan debt among recent college graduates. No matter where the student loan is from, it can help you have tax breaks. But student loan debt can also cause problems with forgiven or settled loans. Taxpayers can get applicable tax credits and deductions can minimize to their tax bill or increase your refund. Whether you pay your schooling fees with a student loan or through personal means, IRS says that you can claim the American Opportunity Tax Credit and the Lifetime Learning Credit. These are both tax credits that reduce the amount of your income subject to tax.
According to a post by MSN, up to $2,500 each year for up to four years can be claimed with the American Opportunity Tax Credit. You could get a refund if this credit reduces your income tax to less than zero. You can claim up to $2,000 per return under the Lifetime Learning Credit. Though it can’t give you a refund, it will definitely reduce your tax bill.
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Interest Deductions under Student Loans
The student loan interest deduction will let you reduce your taxable income by up to $2,500 annually if you pay interest on either private or federal student loans. Once you reduced that amount of your income subject to taxes, there is no need to pay taxes on that income. This can categorize you to a lower tax bracket which means even more tax savings.
You must have used the loan to pay for qualified education expenses for you, your spouse, or a dependent if you want to claim the deduction. A Form 1098-E will be sent to show how much interest you paid during the tax year. The only disadvantage of this is that you can only claim the $2,500 deduction once per return, whether you’re single or filing jointly. If you’re paying student loans for yourself and a spouse you only get it once.
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