If you have student loans, you may be wondering if you qualify for a tax break. You can deduct the amount of your loan interest up to $2,500 a year. However, if you are single and you make more than $70,000 a year, that amount is phased out on a tier system so you may not qualify for the full $2,500. This is an above the line deduction, which means you do not need to itemize to take full advantage of this tax deduction. This is great since many recent college graduates will not begin itemizing the first few years that they are working.
How Do I Take the Deduction?
You will need to file a 1040 form with Schedule 1 in order to claim this deduction. Your student loan company will send you at 1098-E form at the end of the year or in January with the amount of interest you can claim on your taxes that year. Be sure to wait for the form before you file your taxes. It is also important to keep your address updated with your loan company so you can receive the information. If you have student loans with multiple companies be sure that you wait for each company to send you a 1098-E before you file your taxes. This can help you avoid needed to amend your tax return and increase that amount your receive back in taxes.
Should I Avoid Paying off My Student Loans Because of the Tax Break?
Many people look at the tax break as a reason to not worry about paying off their student loans right away. Only the interest is tax-deductible so you are not making up any money that you would not be paying out anyway. It is important to do something about your student loans today. You can look at it as either paying the money in interest or the money in taxes. If you paid off your student loans, you would have that extra money each month, and just pay a bit more in taxes each month. This will give additional money in your budget each month.
If your student loan interest rate is low, and you have other debt you may consider putting your student loan at the end of your debt payment plan. This will allow you to take advantage of the tax deduction as long as you still have debt, but you should not keep the loan in order to take the tax deduction. It is important to work at eliminating your debt as quickly as possible. It will make it easier to reach your other financial goals and to do the things you want to, like purchase a home. Once you purchase a home, you can deduct the interest you pay on a mortgage, and the allowances are higher than for student loan interest.
Don't Forget to Save on Your Mortgage Interest Too
However, once you have the mortgage the same logic can be applied to the tax deduction on mortgage interest. You should focus on the payment that you are keeping in order to save a small percentage of your taxes. Ultimately, you do not get to keep the money you either pay it to the bank or to the government. Putting off paying off your student loans or your mortgage because of the tax deduction just does not make logical sense. It makes more sense to get out of debt and work on building your wealth.
Take Advantage of All Possible Tax Credits and Deductions
In addition to the deductions you may qualify for, you should look into any tax credits you qualify for. The tax credits may be refunded to you if you have extra money after you have covered your tax bill. When you file your taxes, you should either use tax software that is designed to help you find all the deductions and credits you qualify for or go to a tax accountant who can help you find ways to save on your taxes. If you are self-employed or just starting your business, you may want to use an accountant so that you file everything correctly in your first year or two in business.