When you feel like you’re lying under a pile of student loan debt, it’s normal to feel like the world has it in for you when you’re forced to pay taxes. One of the only things you can do to survive for the following year is trying to squeeze as much as you possibly can from tax returns. Deductions and credits should be taken advantage of, especially if you find yourself living from check to check.
With a little bit of knowledge, you can lighten your debt load by using returns to take a large chunk of your debt. Keep in mind the differences between a tax credit and a tax deduction. In general, a tax credit will reduce the amount of income taxes that you owe, whereas a tax deduction will save you the deducted amount multiplied by the marginal tax rate.
There are plenty of ways you can legally hide money from the IRS, but in this article, we’re going to focus on the four smartest ways to make some money back, or at least maximize your savings on income taxes, from the check you cut to the government annually.
1. Deducting Interest Paid
Did you know that you can deduct the amount of interest you pay on your debt? By doing this, you can recuperate some of the expenses that you pay on your student loans. Filing the deduction should be done as an adjustment to your income. The most you can deduct from the interest paid is $2,500, so if you’ve paid more than $600 in interest fees in the last 12 months, you should receive form 1098-E from your creditor. Box #1 will show you how much interest you’ve already paid.
If, however, you pay less than $600 in interest fees, then you’ll need to go back to your records to see how much you can deduct. There is an income cap that you should be aware of. If you’re earning more than $80,000 annually ($160,000 if you’re filing jointly with your spouse), then you’re ineligible to apply for an interest deduction. Essentially, if you’re well off, then you’re going to have to pay the interest on your student loans in full.
For fresh graduates who are anxious about having to pay fees on top of their student loans, this should be something to consider. Even receiving a tiny amount of the money spent on your education – whether it’s only a year after your graduation or 40 years – can be of tremendous help.
2. American Opportunity Credit
The American Opportunity Credit is a tax credit which lets someone shouldering the burdens of a student loan claim up to $2,500 annually for their first four years of education as they work simultaneously to earn a degree. This tax credit can cover 100% of your education expenses of up to $2,000 and 25% of the following $2,000, making it a total of $2,500 free cash to cover some expenses on your education. Only people who are at least half-time students are eligible to be covered by this credit. Applying for this tax credit can be done to help cover the costs of college such as books, supplies, equipment, and any other related expenses.
Only people who have a modified adjusted gross income of up to $90,000 – or $180,000 if you’re filing jointly with your spouse – are eligible for this tax credit. A maximum of 40% of the tax credit is refundable.
3. Deduction Tuition and Fees
Tuition and fees deduction allowed people to reduce their taxable income by a maximum of $4,000. That was until 2016 when the deduction expired, but the Bipartisan Budget Act renewed the tuition and fees deduction in 2018 for the tax year of 2017, meaning that your 2017 federal tax return could have claimed this deduction. You are able to deduct education expenses paid for you, your spouse, or a dependent. This deduction is taken to be an adjustment to income, meaning your claim for this deduction is possible whether or not you itemized the deduction on Form 1040. This is especially helpful to those who are ineligible to apply for the American Opportunity Credit. You can take an education credit in exchange for a tuition and fees deduction, giving you a reduced tax amount to pay. However, you are not allowed to claim tuition and fees as well as an education credit if they are regarding the same exact expense.
4. Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a tax credit that lets students claim up to $2,000 annually for college tuition, books, supplies, and fees that you had to pay in order to take courses. With the LLC, there is no maximum number of years you can claim the LLC. Only those with an adjusted gross income of $65,000 or less – or $131,000 if you’re married and file jointly – can qualify for this tax credit. The LLC is non-refundable, meaning that it is relative to the amount of tax you owe. For instance, if the tax credit is greater than what you owe in income taxes, then you can’t receive the excess in refunds. Although this credit can be claimed every without limit, it cannot be combined with the American Opportunity Credit or the Hope Credit in the same year. You should claim one of the tax credits that can save you the most money based on your particular financial situation.
Undergraduate, graduate, and professional degree students are all eligible to claim the LLC each year. In fact, any student can claim the LLC as long as they are enrolled in an institution that is recognized by the IRS. Their study load must consist of courses aimed to improve their current job skills or help in pursuing a career. Finally, to be eligible to claim the LLC, you must have admitted into a recognized college for at least one academic period (e.g. semester, trimester, summer session) for the year in which you’re claiming the tax credit.