Getting a tax refund can provide some financial relief during the coronavirus pandemic and the economic crisis it triggered.
If you haven’t yet filed your tax return, you still have until July 15, 2020 to submit it to the IRS — the annual deadline is usually April 15, but was bumped back to help give Americans a break during this tough time.
A smart way to increase the size of your tax return — and get the biggest refund possible — is to take advantage of the student loan interest you’ve paid.
Whether or not you’re making payments on your student loans now, the student loan interest deduction allows you to reduce your adjusted gross income (AGI) by the amount you paid in student loan interest last year.
Here’s what you need to know to help maximize your 2020 tax savings.
What is the student loan interest deduction?
The student loan interest deduction is a tax break provided by the IRS, specifically designed for student loan borrowers. Claiming student loan interest on taxes can reduce your AGI by up to $2,500, which is the maximum allowable deduction.
The IRS uses your AGI, which is your total gross income for the year minus certain deductions, to help determine your eligibility for other tax breaks. It also helps determine your taxable income, which is the actual figure the IRS uses to determine how much tax you owe — or how much the IRS owes you.
To qualify for the student loan interest deduction, here are some requirements:
- You paid interest on a qualified student loan in the previous year.
- You’re legally obligated to pay interest on student loan or loans. In other words, you must be listed as a borrower on the loan.
- You’re not married and filing your tax return separately from your spouse.
- Your modified adjusted gross income (MAGI) is less than a certain amount, which is determined annually. In 2020, for instance, the limit is $85,000 for people filing as single or head of household, and $170,000 if you’re married filing jointly. There’s also a phaseout if your MAGI is close to the limit, which we’ll cover in a minute.
- You (or your spouse if filing jointly) cannot be claimed as a dependent on someone else’s tax return.
Qualified student loans include loans that you:
- Took out for yourself, your spouse or a dependent.
- Borrofor education provided during an academic period for an eligible student.
- Used to pay for educational expenses incurred within a reasonable amount of time after you took out the loan.
To give you an idea of how much claiming student loan interest on taxes can save you, let’s say you paid $2,000 in student loan interest last year.
After you fill out your entire tax return, you see that your effective tax rate is 17%.
In this scenario, the deduction would save you $340, which you’d get back from the IRS if you’re due a refund.
How to claim student loans on your 2020 taxes
If you paid at least $600 in student loan interest, you should receive a document called Form 1098-E from your loan servicer. This paper will show exactly how much you paid in student loan interest for the previous year, which is what you can claim on your tax return.
That said, if you paid less than $600 in student loan interest last year, you can still claim what you paid. You just may not receive a form with the details.
If you’re thinking about filing your tax return on your own, you’ll include your student loan interest deduction amount on Schedule 1. If you want to avoid making a mistake, however, or your income may be high enough that you might lose the deduction or get a reduced amount, it may be better to file your tax return through an online tax preparation service or with a tax professional.
In either case, they’ll ask how much you paid in student loan interest and also calculate your MAGI for you, so you don’t have to worry about doing it right.
Also, keep in mind that there’s a MAGI limit — you won’t qualify for the deduction if yours is above $85,000 (single and head of household) or $170,000 (married filing jointly). In addition to that, there’s also a phaseout range between $70,000 and $85,000 or $140,000 and $170,000, respectively.
If your MAGI is in this range, you can still claim your student loan interest, but you may not be able to claim all of it. Also, remember that there’s a $2,500 limit, regardless of your income and how much interest you paid.
How student loan refinancing can provide even more savings
Maximizing your 2020 student loan interest deduction is a great way to boost your tax return. But keep in mind that you’re still only getting a percentage back from the amount you paid.
Student loan refinancing can potentially help you lower your interest rate, which will save you on interest charges for the remainder of your loan’s term.
To qualify, you typically need a relatively high income and a strong credit history. If you don’t have one or both of those, however, you may still be able to get approved with a co-signer.
If you do qualify for a lower interest rate than what you’re currently paying, you’ll still be able to deduct any interest you pay on the new loan, but you’ll also save money by virof a reduced interest rate.
Student loan refinancing may also be able to help you get some more flexibility with your monthly payment — repayment terms range from five to 20 years — and also give you the chance to pick your lender based on rates, customer satisfaction and other features.
Read More: How to Monitor Current Refinance Rates
The bottom line
The student loan interest deduction can make it possible to get back some of the money you pay in student loan interest every year. While it may not be a huge benefit, it could increase your 2020 tax refund by several hundred dollars. Make sure you’re taking advantage of this tax break to get more money back from the IRS.
Additionally, consider refinancing your student loans to potentially save more money on interest charges. Purefy’s Compare Rates tool allows you to compare rate quotes from multiple lenders, all in one place.
Just keep in mind that refinancing federal student loans will cause you to lose federal benefits, such as access to loan forgiveness and income-driven repayment plans. But if you don’t need those, refinancing may help you get a lower interest rate and save money.