The last days before the tax year comes to a close are upon us. Now is the time to make those last minute donations of clothing, goods and appliances to rack up additional tax deductions, and now is also time to make some decisions about how you file your 2013 tax return. Your student loan interest can be deductible, but only if you file under certain conditions.
#1 Marital Filing Status
If you are married and file separately, you cannot deduct your student loan interest. This is an incentive to file together, but there are other concerns. For those under an income sensitive repayment plan such as Income Based Repayment (IBR) or Pay As You Earn (PAYE), filing jointly will mean that both of your 2013 incomes will be considered when determining your 2014 monthly payment amounts. Compare the results of each strategy to see which is most beneficial in the short and long term.
#2 Same Sex Couple Filing Status
The recent Supreme Court ruling that invalidated the Defense of Marriage Act (DOMA) means that same sex couples are recognized for financial aid and tax purposes (among other things), so if you are in a marriage resulting from a valid ceremony in a state where same sex marriage is legal, you have the option of filing your taxes as married filing joint or separate, so everything mentioned in #1 above applies to you as well.
#3 Dependent Status Is Critical
If you’re crashing back home with your Mom and Dad (like many grads struggling with unemployment do), you need to figure out the best strategy. You can’t deduct student loan interest if you’re claimed as someone else’s dependent, but this may be a better strategy. Your parents can claim you on their taxes if you are in school full time, are age 24 or under and they are providing 50% or more of your support. If this is the case, they can deduct $3,900 for you, which is more advantageous than the student loan interest deduction.
#4 Income Threshold Limitations
If your adjusted gross income (AGI) is less than $60,000 or $125,000 for joint filers, you’re eligible for the interest deduction. The good news is that if you’re earning that much, the deduction is probably no biggie to you. But if you are eligible, you should definitely take it, no matter how financially secure you are – no reason to let a good tax break go to waste. Use this student loan interest deduction worksheet to figure out how much you can deduct. The eligible amount goes on line 33 of Form 1040.
#5 Loan Had to Be Used for School Expenses
This is an important consideration – if you over-borrowed and used some of your student loan money for pizza, a car repair, clothes or an off-campus apartment, that portion of your loans is not eligible for a student loan interest deduction. It may be hard to figure out how much of what you borrowed was spent on other stuff, but if you know you borrowed more than your school costs, you need to work up an estimate so you don’t get into hot water.
To help keep an eye on what you’ve borrowed, what you’ve paid back and what you’ve paid in interest, sign up for Tuition.io’s free student loan tool. You should receive a Form 1098-E if you paid more than $600 in interest. You can verify that your loan servicer reported the correct amount of interest by comparing your payment tracking on Tuition.io’s loan dashboard with the form you receive. Don’t take it for granted that your lender got it right.
Be sure to read our blog for other tips on loan repayment and managing your debt. And check out our Student Loan Help Center for How To guides on applying for IBR, PAYE and other important student loan info.