When you are trying to get through school or repay student loans after graduation, the last thing you need is a superfluous expense. And, if you don’t know how to handle student loans on your income taxes, you could be saddled with exactly that. The IRS gives student loan holders several opportunities for tax breaks; you just have to know how to claim them on your tax returns. We will tell you everything you need to know to maximize your tax breaks on student loans in what follows.
While You’re in School
Before your repayment period begins on your student loans, you don’t technically need to do anything out of the ordinary on your income tax returns. However, if you meet certain income requirements, you might be able to take a tax credit or make an adjustment to your income for tuition and fees. The income adjustment would reduce the amount of money on which you have to pay taxes and may also place you in a lower tax bracket. With regard to tax credits, you can either qualify for a Hope credit or a Lifetime Learning Credit, both of which are explained below.
A Hope Credit gives you a tax break of $1,650 per eligible student. The Hope Credit is only available until the first two years of post-secondary education are completed and is only available for two years total per eligible student. Here are the qualification requirements for the
- Student must be pursuing an undergraduate degree or other qualifying education credential
- Student must be enrolled for at least half-time status for at least one academic period of the year
- Student’s record must be free of felony drug convictions
Lifetime Learning Credit
The Lifetime Learning Credit allows a credit of up to $2,000 per income tax return. The credit can be used for all years of the student’s post-secondary education and is available for an unlimited number of years. The felony drug conviction rule does not apply to the Lifetime Learning Credit. To qualify, a student does not have to be pursuing a degree or other education credential. The credit is available for one or more courses.
When Repayment Begins
If your income does not exceed a certain level, you might qualify for the
student loan interest deduction once you begin repayment of your loans. This deduction is claimed as an income adjustment, which means you do not have to itemize deductions to claim it. You can claim up to a $2500 deduction if:
- You paid interest on a qualifying student loan during the tax year.
- Your filing status is not married filing separately.
- Your adjusted gross income is less than $65,000 or, if filing jointly, $135,000
- If filing jointly, you and your spouse cannot be claimed as dependents on someone else’s tax return.