One great way to help mitigate the expense of student loans is to let your taxes help you out. Sound counterintuitive? It’s true though, there are several tax credits available to students to help pay for higher education. It’s also possible to deduct interest payments on your student loans. Here are some ways in which being tax savvy pays off.
1. Tuition and Fees Deduction
A number of expenses related to higher education will qualify for this deduction. You can knock as much as $4,000 off your taxable income if you are attending a school that is eligible to receive federal financial aid. This includes tuition for almost all accredited public, nonprofit, and for profit postsecondary institutions. Deductible fees include any student activity related fees that are required to be paid to the school.
2. Student Loan Interest Deduction
You may be able to deduct some or all of the interest payments on your student loans from your taxes. Qualifying for this deduction depends on your filing status, your modified adjusted gross income, whether or not you were legally obligated to make student loan interest payments in the given year and a couple of other factors. If you qualify you can deduct either the full amount of your student loan interest payment or $2,500, whichever amount is smaller.
3. American Opportunity Credit
This is a tax credit that applies to students within the first four years of their studies who are on course to a degree. As long as you maintain half-time status as a student, you can apply this credit towards tuition, books and supplies. This credit can be claimed for as much as $2,500.
4. Lifetime Learning Credit
This credit can be applied to the same expenses as the American Opportunity Credit, but it’s geared towards continuing education. It applies to most people who are attending college courses and be claimed up to $2,000
The above are definitely the rock stars of student loan tax breaks, but there are several other ways the IRS can help out with your student loans. On top of these fairly standard ways of getting tax breaks, believe it or not there are some IRS opportunities with a little more flair. Did you know that the IRS rewards whistleblowers? It’s true, if you know of any tax evaders, you can become an anonymous informant and the IRS will reward your public service efforts with between 15% and 30% of the recovered amount. Think of yourself as the James Bond of tax evasion.
Taxes are a prime example of how complicated personal finance can be. There are loads of ways that student debt management can help you take advantage opportunities that might otherwise remain buried in a sea of paperwork and financial jargon. Getting help from someone who knows the ropes will spare you money and a headache.