Americans with student loan debt could benefit from a $25,000 reduction in their taxes and an ever-increasing return.
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Last December, President Biden suspended all federal student loan debt payments through May 1. This tax season, current students and school loan holders should know all the deductions and credits available to them. Read more here.
It doesn’t matter whether the loans are private or federal, the interest deduction allows them to reduce their taxable income for relief of up to $2,500 per year. It depends on how much interest they were paying.
Loan holders are eligible for these deductions, if they paid interest in 2021. Their Modified Adjusted Gross Income (MAGI) is less than $70,000 or less than $100,000 married, when filed jointly. You may also be eligible if their MAGI is between $70,000 and $80,000 for individuals, or between $100,000 and $170,000 as a joint filing.
If you have a loan, log into your student loan portal and check Form 1098-E for any qualifying interest payments.
By doing this, you could reduce the amount you owe the IRS or increase your tax refund. Some people may be lowered into another tax bracket after the fact.
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There are other possibilities for tax relief
First-time college students, within their first four years at an institution, may be eligible for the United States Opportunity Tax Credit (AOTC).
The AOTC allows students to claim 100% of the first $2,000 of eligible educational expenses. Then it also helps relieve the first $2,000-$2,500 spent.
If you are a parent, you can also apply for the AOTC if your child is listed as a dependent.
To claim the full credit, your MAGI must be $80,000 or less, or $160,000 or less for those who are married and filing jointly.
ATOC is a refundable credit. This means it could reduce your income tax to less than zero, resulting in a refund. You may be able to get a refund of your taxes or increase your existing tax refund.