When you’re in college or paying off student loans, every extra penny helps. That’s why you’ll want to get the biggest tax refund you qualify for. You can deduct up to $2,500 from your taxable income if you paid interest on your student loans.
If you fall into the 25 percent tax bracket, the maximum deduction would put $625 back in your pocket.
Be advised that proposed tax reform could eliminate the interest deduction for student loan borrowers and change the picture for education tax credits as well. A bill could reach the president in time for the upcoming tax season.
If a tax reform bill doesn’t become law, current tax guidelines are likely to be carried over with small updates. The information below is based on tax guidelines in place for the 2016 tax year. Guidelines for 2017 have not been released.
What tax breaks can I get
for my education costs?
When you repay student loans, you’re not just paying down the original balance; you’re paying interest, too. The student loan interest deduction will let you subtract your interest payments from your taxable income if you earned less than $80,000 last year. (Grads who earned between $65,000 and $80,000 can deduct a reduced amount of interest.)
If your parent took out a loan for you, he or she will take the deduction. But neither of you can take it if the loan is in your name and you’re listed as a dependent on your parent’s tax return.
If you’re still in school, the government also offers one of three additional education tax breaks. You can take a deduction of as much as $4,000 for tuition and fees, or you could claim one of two outright tax credits: the American Opportunity Tax Credit, worth up to $2,500, and the Lifetime Learning Credit of up to $2,000.
Do I need to file
a tax return?
You must file a tax return if you earned more than $6,300 in 2016 — even if your parents can claim you as a dependent. If you don’t, you’ll pay a failure-to-file penalty, which means you’ll owe the IRS an extra 25 percent or more in taxes, and you’ll forfeit any tax refund you’re entitled to.
Even if you made less than $6,300, the IRS recommends filing a return. That way, you’ll receive a refund if you qualify for one — money you can put toward savings, student loans or other financial goals.
Can my parents claim
me as a dependent?
Your parents can list you as a dependent on their tax return if:
You’re 19 years old or younger, you’ve lived with them for more than half of the year, and they’ve provided more than half of your financial support.
You’re 24 years old or younger and a full-time student.
You’re older than 24, you earned less than $4,050 in 2016, and your parents provided more than half of your financial support.
If your parents claim you as a dependent, you can’t claim yourself on your return — and you can’t receive education deductions or credits.
If your parents claim you as a dependent, you can’t claim yourself on your return — and you can’t receive education deductions or credits. Be sure to check the box that says somebody else can claim you as a dependent.