Moxie

By Elizabeth Paal, CFP®, CRPC®

It’s fitting to continue the discussion of student loans this month as the federal aid loans reset interest rates for upcoming school years in July.  Did you know Americans owe approximately $1.3 trillion in student loan debt spread out among 43 million borrowers? If you’re one of those 43 million, did you know you may be able to deduct your student debt interest for tax purposes?

The IRS allows you to deduct a portion of your student loan interest, up to $2,500, from gross income if you meet a few specific requirements:

–The interest paid must be for a qualified education loan used to pay for higher education expenses.  Typically, federal student loans, private bank loans, state loans and college loans are eligible. Loans from Mom and Dad or other relatives, trusts or qualified employer plans are not included.  

– The debt must have been incurred while enrolled as a student for at least a half time basis.

– If you are married, then you must file a joint return.

– In order to take the full allowable deduction, your modified adjusted gross income (MAGI) must be under $65,000 for single filers and under $130,000 for joint filers. Partial deductions are available if your income falls between $65,000 and $80,000 for single filers or $130,000 and $160,000 for joint filers.  

If you’ve checked all of the above boxes and meet these requirements, then it is time to look at how much interest you paid on student loans for the year.  If you paid over $600 of interest to a single lender for a qualified student loan, then you should receive a Form 1098-E from the lender. Keep track of how much interest you’re paying in case you don’t pay up to $600 to a single lender, or if the lender forgets to send you the form. Once you have this form, you can possibly claim up to $2,500 of the interest for your federal tax return. 

You might also be entitled to tax credits through the American Opportunity Credit or the Lifetime Learning Credit for the higher education expenses you incur that tax year. If you are currently enrolled in undergrad at least half time and your modified adjusted gross income is below $80,000 for single filers or $160,000 for joint filers, then you can receive a credit up to $2,500 for 2016 tuition and related expenses.

If your MAGI is between $80,000 and $90,000 single or $160,000 and $180,000 joint, then you might qualify for a partial credit. If you are pursuing a graduate or professional degree, you can apply for a Lifetime Learning credit. This credit is used to cover tuition and fees for higher education courses taken throughout your lifetime and is worth up to $2,000 in 2016.

To take the full credit, your MAGI must be below $55,000 if filing single or under $111,000 if filing joint.  A partial credit is also available if your MAGI is between $55,000 and $65,000 single or $111,000 and $131,000 joint. Unfortunately, you cannot take both the American Opportunity Credit and Lifetime Learning Credit in the same tax year, but you can combine them with student interest deductions if the above requirements are met.

In today’s day and age, many online programs exist to help individuals file tax returns, such as turbotax.com, freetaxuse.com and efile.com, but these do not always take into account all of the benefits for education expenses. If you have student loans or qualified student expenses this tax year, it is a good idea to meet with a tax professional and ask about your options for getting the largest deductions and credits available to you.

Next month I will address repaying student loans and refinancing student loans.  If you have any questions, please feel free to reach out at Elizabeth.Paal@LFG.com.

Elizabeth Paal is a Director of Financial Planning at Heritage Financial Consultants, LLC and a registered representative of Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor.  Heritage Financial Consultants is not an affiliate of Lincoln Financial Advisors.  

CRN- 1517252-060316