Student loans can save you money on your income taxes. They may take several years to pay off, because of the large amounts people borrow to pay for school. The federal government allows you to deduct the interest you pay each year from your income taxes, if you meet specific guidelines.
Student Loans and Income
Student loans are not considered income, and do not need to be reported on your income taxes in the years that you borrow them. Some college students become confused about what is income and what is not when it comes to scholarships, grants and student loans. Student loans are not part of your income. However, you may be required to report any income you get from a teaching assistantship or scholarship that exceeds the cost of your tuition and books.
Student Loan Interest Tax Deduction
Once you begin paying your student loans off, you can deduct the interest earned on your federal income taxes. The deduction is available to couples filing jointly with an adjusted gross income of under $145,000 and to singles with an adjusted gross income of less than $70,000. You can claim up to $2,500 in interest each year. This deduction is made directly to your income, and you do not need to itemize to take advantage of it.
In order to qualify, the loan needs to have been taken out solely for education purposes. Both private and federal student loans qualify for this. Student loans taken out by parents for their children, such as a Parents Plus Loan, will work as long as the child was considered a dependent at the time they took out the loan. A home equity loan, while it may have been used as a way to finance education, would not qualify for this tax deduction.
Claiming the Deduction
The bank will mail you a 1098-E Student Loan Interest Statement sometime in January of each year for any eligible loan you have. This will list the amount that you paid in interest on the loan during the year. When you are doing your taxes, you will come to a place that asks for the information on this form. If you take your taxes to an accountant, then you should take this form with you when you meet with her. Keep a copy of the form with your tax records for the year, in case you are audited.