If you’re one of the 48 million Americans repaying loans from school, expect a little bit of relief come tax time. Interest you paid on a student loan can be counted against your income for the year, reducing the amount of money on which you pay tax.
This applies to any loan you took out to pay for educational expenses, like tuition, books, room and board or necessary transportation. The loan can be for yourself, your child or another relative — as long as your name is on it, and your income is under the IRS’ limits, you can deduct that interest from your taxes.
“Even if you don’t have a student loan per se, if you took a loan out and you’ve only used that account for qualifying educational expenses, the interest on that loan will be deductible,” Alicia Jegede, founder of New Gen Financial, told CBS MoneyWatch.
Best of all, you can claim this benefit even if you take the standard deduction.
How much can you deduct?
Your loan provider will usually send a form, called a 1098-E, indicating how much interest you paid for the year. It’s best to wait for this form and not try to estimate your interest payments.
The IRS limits the deduction to $2,500 per year. At today’s interest rates, that means you need a student-loan balance of over $50,000 before you hit the limit. The average household with student loans has just over $47,000 in debt, according to a NerdWallet survey from last December, so most people should be covered.
There are a few restrictions on who can take this deduction, noted Sahang-Hee Hahn, a tax attorney at a large financial services firm. Your filing status can’t be “Married Filing Separately,” and you also can’t be claimed as a dependent on someone else’s tax return.
There is also an income limit. If your modified adjusted gross income (MAGI) was more than $70,000 as a single filer, or $140,000 as a married couple, you can only take a partial deduction. The IRS offers a formula to calculate how much you’re allowed to claim. Once you earn more than $85,000 as a single filer, or $170,000 married, you’re ineligible for the deduction.
How much do you save?
A deduction reduces how much of your income is subject to taxation, so its value depends on what tax bracket you’re in.
For example, a single woman who earned $60,000 last year and took the standard deduction would have a top tax rate of 22%. (Thanks to her income, she likely would also be able to file her taxes for free.) If she deducts $2,000 of student-loan interest, she would save 22% of $2,000, reducing her tax payment by $440.
Now, getting back $440 at tax time may not seem like much when you’re trying to shave down a $40,000 loan balance. But as long as you’re eligible to take some money — any money — back from the government, take advantage of that.