If you have student loans, it is important to understand that there are higher education deductions and credits that may be available to you. The two most commonly used credits and deductions are the American Opportunity and Lifetime Learning as credits and the tuition and fees and student loan interest deductions. For additional information read Internal Revenue Service Publication 970.
In order to get the most benefit out of student loan credits and deductions, you should consider the following:
The American Opportunity Credit allows you to credit a maximum of $2,500 in qualifying education-related expenses that you paid for each student over the applicable tax year. In other words, if your household has more than one student (that is you, your spouse or your dependent), you can accumulate a significant amount of credits that can reduce your tax bill.
It is important to understand that how you file your taxes can play an important role in using your credits. For example, you cannot claim the credit if you are married, but you and your spouse file separate taxes.
Even better news, if you end up having money left over after paying your tax bill, up to 40% of this credit is refundable. This means that you could actually get some of the student loan credit refunded to you in cold hard cash!
Similarly, the Lifetime Learning Credit can also lessen your income taxes by up to $2,000, although it is not refundable. This tax credit can reduce your taxes down to zero, but you will not be refunded any remaining balance after your tax bill has been paid.
Deductions are different from credits because they reduce the amount of your income that is used to calculate your tax liability, instead of directly reducing the amount of the tax you owe. For example, if your income is $45,000 and your deductions equal $5000, the IRS calculates your tax bill off of an income of $40,000.
A common student loan deduction of up to $2,500 in qualifying student loan interest payments made in the applicable tax year can be deducted from your taxed income. Again, you cannot claim this deduction if you are married but you and your spouse are filing separate tax returns.
Another common student loan tax deduction is for qualifying tuition and fees paid during the applicable tax year for yourself, your spouse or a dependent. This deduction can be up to $4,000 and it includes qualifying expenses that you paid with your loan money.
The above is a very general explanation of student loan credits and deductions. There are many rules and restrictions that apply, so it is important to confer with a qualified tax professional regarding your individual situation.
If you have questions regarding your student loans, contact our office to schedule an appointment.The “defender of the little guy,” DeLadurantey Law Office, LLC. handles student loan debt and bankruptcy matters (Chapter 7 and Chapter 13) in Milwaukee, South Milwaukee, West Milwaukee, and Milwaukee County, including the municipalities of Bayside, Brown Deer, Cudahy, Fox Point, Franklin, Glendale, Greendale, Greenfield, Hales Corners, Oak Creek, River Hills, Shorewood, St. Francis, Wauwatosa, West Allis, and Whitefish Bay. The firm also can handle your debt negotiations, debt relief, and mortgage loan modifications. Contact DeLadurantey Law Office, LLC by phone: (414) 377-0518. Like us on Facebook.