For those of us in the early part of our financial life-cycles, the little things can make a big difference. This is especially true for student loan borrowers like myself. Since it's tax season, I wanted to devote a little time to one of these little things: the Student Loan Interest Tax Deduction. You may or may not have heard about it, so I'd like to dispel a few common misconceptions about the deduction and also get into how (and if) you can take advantage of it.
Bottom line, you can benefit from the deduction even if you:
1. Have private student loans
2. Don't itemize your deductions and
3. Make over $60,000 in a given year.
These are all reasons I've heard friends and student loan borrowers give for not bothering with the Student Loan Interest Tax Deduction or their 1098-E. And all of them represent misconceptions about how the deduction works.
Before I go too deep, let me just say that you should use the official guidance from the IRS for reference and as final authority. I'm not an accountant, and am simply attempting to distill the information in that publication.
First, some extremely basic tax terminology. This is a "deduction" in the sense that it can be used to reduce the amount of income that the government taxes. So what's happening is, the federal government is coming at your annual income with the applicable tax rate and saying you made $X. And you're saying, ""No, no, government, I really made slightly less than $X because of this nifty rule you wrote about student loan interest, so you only get to tax $X minus the Student Loan Interest Deduction." It's helpful to think of any deduction as an amount you're legally allowed to exclude from the taxable income you're reporting to the government.
Someone who knows just enough about taxes to be dangerous might say, "Well if it's a deduction, then I'd have to itemize my deductions right? I've heard that this is something you should only do if you're a homeowner or wealthy. What's the deal?" Not so fast! The student loan interest deduction is what's known as an "above-the-line" deduction. So there's no need to itemize your deductions in order to benefit. If that's Greek to you, then don't worry about it. It just means you don't need to get bogged down in tax elections or complications to benefit from the student loan interest deduction!
Furthermore, you can take advantage of the deduction whether your loans are private or federal. There are a few provisos here (one can't deduct interest on debt to a family member), but I will say that you can deduct interest on "private student loans" as that term is generally used. And you can do so even if you've refinanced or consolidated your debt.
If you're concerned about calculating how much interest you paid in a given year, don't worry, your student loan servicer will make that easy for you. Your servicer is the company that manages your repayment (the people you pay every month). These are the people you've likely worked with to set up direct debit or to manage any repayment issues. For federal loans, that's usually either Sallie Mae, MyFedLoan (PHEAA), NelNet or Great Lakes. For a full list of the services that manage federal loans, see this website. Your servicer is obligated to deliver a neat little form to you, the 1098-E, which lays out how much interest you paid on your student loan in the previous tax year. This is the amount you can deduct from your income (or $2,500 if you paid more than that in student loan interest)!
Final point, your income does affect your eligibility for the deduction. To get a sense of just how much, you'll first need your Modified Adjusted Gross Income (MAGI). This, for most student loan borrowers, is just your adjusted income before taking into account the student loan deduction. Fortunately, most tax services (e.g., TurboTax) and your accountant will be able to tell you your MAGI for these purposes. If your MAGI is $60,000 or below ($125,000 or below if filing jointly), then you can deduct the smaller of $2,500 or the student loan interest you paid in 2013. If your MAGI is above $75,000 ($155,000 for joint filers) then you cannot benefit from the student loan interest tax deduction. If you fall in between, then the amount you can deduct is gradually phased out as your MAGI approaches either $75,000 or $155,000. If your income falls near these amounts, then I encourage you to either ask your accountant about the Student Loan Interest Deduction or still attempt to take advantage of it using your tax service.
Even little things like this aren't always simple, but I don't want people to walk away from this tax deduction simply because they misunderstand it. Best of luck with your tax returns!
Nate Howard is Community Curator at CommonBond, a a student lending platform that provides a better student loan experience through lower rates, superior service and a strong commitment to community. CommonBond is also the first company to bring the 1-for-1 model to education.
You know you can't afford it. You might as well be burning your money.
A good credit history is essential to a successful financial future. Landlords, lenders, insurers and even employers use it as a way to judge you.
Yes, you want to make sure that you establish a credit history, but that does not mean taking out every credit card imaginable. Taking our high-interest cards with large balances can lower your credit score and lead to overspending.
If you want to increase your credibility in the eyes of lenders, paying bills on time is essential. Also, it is a good way to avoid unnecessary late fees!
A graduate degree is not only a financial investment, but a time investment. Before embarking on a post-graduate degree, it is important to do a cost-benefit analysis to ensure the diploma you are seeking is right for you.
Going after a degree at a time when you have to take out enormous student loans just to graduate puts you at a significant financial disadvantage once you finish school.
It is called your emergency stash for a reason! And no, a flash sale at Nordstrom Rack is not an emergency.
Be honest, when was the last time you actually had a full fridge? Despite what you keep telling yourself about how expensive groceries are getting, the bottom line is that eating at home saves money, especially if you are single.
We understand that retirement could not feel further way when you are in your 20s. But it is never too early to start saving. Need an incentive? When you are young, you have the advantage of giving your investments much more time to accrue interest and grow.
As much fun as it is to get a tax return at the end of the year from the IRS, you only get a big refund when your employer is withholding too much money from your paycheck during the year. If that's the case for you, adjusting your withholdings may be a good idea.
Most budget gurus suggest that your rent should be no more than 30 percent of your monthly income. If you are anything like us, you are paying much more than that.
Follow Nate Howard on Twitter: www.twitter.com/nathanhoward44