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12 hours ago
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How to qualify for student loan interest deduction
Tax breaks are available for current students and those who have already graduated from college, although rules for each individual program vary. Student loans can reduce your annual income tax burden through the student loan interest deduction, whereas the American opportunity tax credit and the lifetime learning credit apply to higher education expenses. The student loan interest deduction is available whether you have federal or private loans, and it can reduce your taxable income by up to $2,500 annually. Whether you're still in college or you've already graduated, you may be eligible for tax deductions and credits if you have paid for higher education expenses or used student loans to help foot the bill. Such education tax benefits include the student loan interest deduction, the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC). Note that you do not need to pay taxes on funds received through a student loan since this money is not considered taxable income. Get an overview of how student loans can impact your taxes during school, after you graduate and for years to come. The student loan interest deduction lets eligible taxpayers deduct up to $2,500 in student loan interest from their taxable income each year. With this deduction, the IRS focuses on the interest you paid to your lender. The actual loan payment itself isn't deductible – only the interest you've paid off is. You can deduct either $2,500 or the full amount of student loan interest you paid in the tax year, whichever is less. This deduction can also apply for either federal or private student loans, and it phases out when you reach certain income levels. For the 2024 tax year, income rules and thresholds are as follows: Single, head of household and qualifying surviving spouse: The deduction starts to phase out when your modified adjusted gross income (MAGI) reaches $80,000. At $95,000, the deduction disappears completely. Married filing jointly: The deduction phaseout begins once your joint MAGI reaches $165,000. If your joint income surpasses $195,000, you can no longer claim the student loan interest deduction. You must file taxes jointly if you're married. You paid interest on a qualified student loan during the tax year. You were legally obligated to pay interest on the student loan. When filing jointly, neither you nor your spouse were claimed as a dependent on someone else's tax return. The loan was taken out to pay for qualified higher education expenses during an academic period and paid or incurred within a reasonable period of time. To claim the student loan interest tax deduction, you'll take the following steps: Step 1: Consider your MAGI for the tax year. Confirm you earned below the threshold to qualify for the student loan interest deduction or a partial deduction. Step 2: Figure out how much student loan interest you paid during the tax year. When you pay at least $600 in qualified student loan interest, your lender should send you an IRS Form 1098-E (Student Loan Interest Statement). You can use this form to claim the student loan interest deduction when filing your taxes. Step 3: Claim the maximum deduction you're eligible for. Claim the deduction on your income tax returns (Form 1040). Unlike many other tax deductions, you don't have to itemize your tax return to take advantage of the student loan interest deduction. There are additional student loan tax benefits you can qualify for, including the American opportunity tax credit and the lifetime learning credit. The AOTC is worth up to $2,500 per student per year, although it can be claimed for only four total tax years per student. Up to 100 percent credit is available for the first $2,000 worth of qualified education expenses annually. After that, a 25 percent credit is available for the next $2,000 of qualified education expenses each year. The credit is gradually reduced for filers with the following MAGI (filers with MAGIs above these limits are not eligible): Single filers: Between $80,000 and $90,000 Joint filers: Between $160,000 and $180,000 The American opportunity tax credit is not a tax deduction. Although the two terms sound similar, the difference is significant. A $2,500 tax deduction simply reduces your taxable income by $2,500, but a $2,500 tax credit would reduce your tax bill by the entire amount. The student must be attending school at least half time for at least one academic term. The student must not have finished the first four years of a postsecondary program before the end of the tax year. The student must pursue a program that will end with a degree or other recognized credential. The student cannot have a felony drug conviction at the end of the tax year. The lifetime learning credit is worth up to 20 percent of the first $10,000 in eligible education expenses – or up to $2,000 – per year. In addition, it has more lenient requirements than the American opportunity tax credit. Like the American opportunity tax credit, the lifetime learning credit is a tax credit rather than a deduction. The income limits and phaseouts are also the same – a limit of $90,000 for single filers and $180,000 for joint filers applies with phaseouts beginning at $80,000 and $160,000 for single and joint filers, respectively. You can't apply both the American opportunity tax credit and the lifetime learning credit to the same education expenses. Generally, you'll need to choose one or the other in any given tax year. There is no minimum requirement for how many hours you need to be enrolled to qualify. There is no limit to how many years the credit can be claimed. Students do not need to be pursuing a degree or other recognized education credential; in other words, students can use this credit for courses focused on acquiring job skills or continuing education. The student must be enrolled or taking courses at an eligible educational institution. Navigating student loans on your taxes can be tricky, but you should now feel more informed as you move forward. You don't have to stop here, either. There are plenty of other resources available to help guide you through the process. IRS tax credit comparison chart: If you're still in school, you can use this handy chart to explore the American opportunity tax credit and the lifetime learning credit to find which best suits you. IRS Publication 970: This publication outlines tuition reductions, how to claim credits, how the interest deduction works and more. Other tax resources: If you feel unsure about filing your taxes yourself or which deductions or credits might apply to you, you can always contact a certified public accountant or explore other tax resources for help. Having to borrow money for college may not be ideal, but you can at least save some money when you file your taxes if you paid student loan interest and meet other eligibility requirements. There are also tax credits that can apply if you paid for higher education expenses in a tax year, though income requirements apply. Since each of these programs works differently and may or may not apply in your situation, you should arm yourself with information and take steps to reduce the amount of money you borrow and have to pay back. How does student loan forgiveness affect your taxes? If your student loan debt is forgiven entirely, or even a portion is forgiven, you could be on the hook for an unexpected tax bill. Similar to other debts canceled by a creditor, the IRS considers forgiven student loan debt taxable income. The amount of debt that is forgiven becomes part of your gross income for the year and is subject to income taxes. There are some exceptions. Student loan debt is not considered taxable income if it is eliminated through programs like the Public Service Loan Forgiveness. If your debt has been forgiven, speak with a tax professional to determine how your forgiven balances will be treated. How do 529 funds affect your taxes? According to the U.S. Securities and Exchange Commission (SEC), money in 529 plans can be used on a 100 percent tax-free basis when put toward qualified educational expenses. These expenses can include (but are not entirely limited to): Tuition and fees Room and board Books and supplies Computers and related equipment In most states, you can also use up to $10,000 in student loan payments from your 529 without incurring a penalty or having to pay taxes. These funds can be applied toward both federal and private student loans. What happens to your tax refund if you default on student loans? Defaulting on a student loan can hurt your credit score and cost you extra money. Your wages could be garnished and you could even have your tax refund withheld. If you're at risk of defaulting, take steps to set up a repayment plan or enroll in a forbearance program. Consider calling your loan servicer to create a plan to help you manage your monthly payments. You might be eligible for a hardship program, an income-driven repayment plan or a settlement.
Yahoo
16-06-2025
- Business
- Yahoo
Can I use a 529 plan to study abroad?
You can use a 529 plan for study abroad, but only at schools eligible for Title IV federal student aid. Qualified expenses include tuition, fees, book and room and board — but not travel, health insurance or daily living costs. Misusing funds can trigger income taxes and a 10 percent penalty. 529 plan withdrawals may be taxed by the host country, even if they're tax-free in the U.S. Yes – you can use a 529 plan to help pay for a study abroad program if the overseas institution is eligible for Title IV federal student aid, but using these funds internationally comes with strict rules. Not all schools or expenses qualify, and misusing the money could cost you in taxes and penalties. Before you book your flight, be sure to confirm your study abroad program is hosted at an eligible institution under the Department of Education. Make sure the funds are only being used for qualified expenses, and you understand which expenses are not covered. A 529 plan allows you to save money for 'qualified' education expenses. Generally, those include the normal costs of attending an educational institution. >>Learn more: Opening a bank account while abroad To count as qualified, expenses must be required by the school and directly related to your enrollment. Eligible costs include: Tuition and fees Books, textbooks, supplies and equipment Room and board, if enrolled at least half-time Computers and internet access Bankrate's take: If you're living off-campus, your rent must fall within your school's published room and board allowance. Save receipts in case of an audit. Even if the following are necessary costs while studying abroad, they cannot be paid with 529 funds: International health insurance or medical costs Flights and transportation Basic living expenses (groceries, clothing, toiletries) Cell phone plans Sports and activity fees If you use 529 funds to pay for these nonqualified expenses, the IRS will apply income tax to the withdrawals, as well as a 10 percent penalty on the earnings portion of the withdrawal. Covered by 529 Not covered by 529 Tuition and fees Flights and transportation Books and supplies Health insurance Room and board (must be part-time or full-time students) Daily living expenses (groceries, clothing, toiletries, etc.) Computers and internet Cell phone bills Sports and activity fees You can't 'double-dip' by claiming the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC) on the same expenses you pay with 529 funds. If you use 529 funds for expenses already covered by those credits, those withdrawals may become taxable. Here's a step-by-step guide to make sure your withdrawal is tax-free and properly documented: Confirm school eligibility: Use the Federal School Code Search, which has the unique school codes assigned by the U.S. Department of Education to schools included in the Title IV federal student aid program. Get an official cost of attendance: Request a breakdown of qualified expenses from the school, including room and board limits. Calculate your qualified expenses: Only include tuition, fees, book and room and board. Exclude unqualified costs like travel or food. Withdraw only what's needed: Request a distribution from your 529 plan administrator, specifying who receives the funds — either the student, the school or both. Keep detailed records: Save receipts, invoices and course requirement lists. You may need them if the IRS ever questions the withdrawal. Using a 529 plan to fund study abroad can make sense — but not always. Here's what to consider. Your school abroad is Title IV eligible. You're earning a full degree or completing a semester abroad through a partner program. You want to avoid loans and already have funds saved in your 529. You're using funds for tuition and qualified room and board, not daily expenses. You're attending a school that isn't Title IV eligible — your withdrawals will be taxed and penalized. Most of your expenses will be for travel, insurance or other unqualified costs. You're participating in a short-term third-party program with hard-to-document expenses. You plan to take advantage of the AOTC or LLC tax credits and want to avoid overlap. Yes – you can often use federal financial aid for international schools, but only if the institution participates in the Title IV program. Eligible aid includes: Pell Grants Direct Subsidized and Unsubsidized Loans PLUS Loans Bankrate's take: Graduate students may have different aid limits, but many federal programs are still available abroad. Always confirm with your school's financial aid office. If a 529 plan won't fully cover your costs or your school isn't eligible, here are other ways to fund your experience: Apply for scholarships The U.S. Department of State provides a list of scholarships available for students studying abroad in different countries, typically provided by foreign governments. Scholarship search engines can help you find financial aid from private organizations. Manage your expenses Unless your study abroad plans are already set in stone, consider going to a country with a lower cost of living. Compare program costs between universities and try to find the right fit for your budget. Get a job Depending on which country you're planning to study in, you may have opportunities to work while you complete your coursework. Research visa requirements beforehand to understand what your options will be. You can also take a break between semesters and work at home before you travel. Be forewarned that if you're caught working without a proper visa, you may be required to leave the country, even if you didn't finish your course of study. Stick to a budget Choose locations with a lower cost of living, avoid tourist-heavy cities and continue being intentional with your spending. Saving plans are one financial tool you can use to pay for study abroad programs and can be a useful way to cover the expenses of education overseas. Consider all costs, including taxes, when factoring your decision and determine if using a 529 plan to pay for your education makes sense for you. If a 529 plan isn't the best option, and you don't have enough savings or free aid to cover your program, keep an eye on current student loan interest rates. Exhaust all federal options before turning to private ones. What are the tax implications when using 529 funds for international schools? Qualified withdrawals from a 529 plan are tax-free under U.S. law, but some governments may tax the funds. Always check local tax laws before using 529 money overseas. How do I know which international schools are eligible for 529 plans? The funds from a 529 plan can only be used to cover the costs of international schools that are eligible for Title IV federal student this complete list of International schools participating in the Federal Student Loan Programs. Only schools on this list are eligible.
Yahoo
11-04-2025
- Business
- Yahoo
Tax Day Countdown: 6 Last-Minute Tax Savings Tips for College Students
With CollegeBoard reporting rising full-time undergraduate tuition rates for the 2024-2025 school year, college expenses can clearly challenge any budget. That makes it worth looking for ways to at least cut your tax bill if you haven't filed your 2024 taxes yet. For You: Try This: As a college student, you might qualify for significant education-related tax credits and deductions or even have access to tax-free funds to use for important costs. Your job situation and certain retirement accounts may also lead to tax breaks. If you are planning to file your taxes last-minute like it's an English Lit paper due the next day, here are six of the best tax savings tips for college students. If you're in an undergraduate program, the American Opportunity Tax Credit (AOTC) might cut your tax bill by up to $2,500 or provide up to a $1,000 refund. According to TurboTax, it covers money spent on tuition and expenses, like books and equipment, but not room and board. This education credit has some strict rules. You can't claim it on your tax form after your fourth year of studies, and you must take at least a half-time load for one period or more at an eligible school. Plus, to get at least a partial credit, your modified adjusted gross income (MAGI) can't be more than $90,000 if you're a single filer or $180,000 if you're a joint filer. The school should send a 1098-T form that reports the year's education expenses. The first $2,000 in education expenses can qualify for a 100% credit, and an additional $2,000 in expenses qualifies for a 25% credit. Trending Now: While the AOTC offers the bigger tax break, the Lifetime Learning Credit (LLC) is a nonrefundable alternative that could cut your tax bill by up to $2,000, or 20% of $10,000 in eligible education expenses. It's a good backup option due to its more lenient rules. While you still have to attend an eligible school for one period or more, there aren't minimum course load requirements, and the LLC is available for unlimited years. Plus, various programs and training courses qualify as long as they're for building job skills. However, the same MAGI limits apply to get at least a partial credit. If you made student loan payments in 2024, the IRS allows deducting up to $2,500 in interest paid as long as you took that loan out for legitimate educational purposes. There are a few rules to be eligible, including not being someone's dependent and not exceeding the 2024 MAGI limits of $95,000 for single filers and $195,000 for joint filers. Additionally, the deduction is gradually reduced based on your MAGI. The loan servicer will often send a 1098-E form with the interest amount. If not, check your loan statements or online loan account for this information. Whether you or your parents opened the account, you can use funds in a 529 plan or Coverdell education savings account for college expenses, like tuition and textbooks. Plus, you don't have to pay taxes to withdraw that money as long as it goes toward eligible expenses. This tax benefit makes education savings accounts a more attractive funding source than retirement accounts you might feel tempted to tap into. Just keep in mind that you'll usually need to use any remaining Coverdell account funds by age 30, per the IRS. According to the Lumina Foundation, the majority of college students also have jobs. You might have gone the self-employed route for flexibility and started freelancing, delivering meals or tutoring other students. Many business expenses related to this work are deductible on your Schedule C. Some examples could include business mileage, self-employed health insurance, equipment, home office use and even cellphone expenses. Make sure to have documentation backing up deducted expenses and avoid writing off any non-business portions. If it's your first time filing a self-employed return, working with a tax professional may be wise. To both potentially save on taxes and make progress toward building wealth early, consider contributing to available tax-advantaged retirement accounts as a college student. While pretax money put into a traditional 401(k) simply lowers your taxable income, traditional IRA contributions are deductible up to the IRS limits based on your filing status, MAGI and any employer plan coverage. Roth IRA contributions involve after-tax funds and won't reduce your 2024 tax bill, though future tax-free withdrawals are possible. If you weren't a full-time student for at least five months during the year, you might also qualify for the Saver's Credit. It's worth up to $1,000 for a single filers and $2,000 for joint filers. Caitlyn Moorhead contributed to the reporting for this article. More From GOBankingRates 6 Used Luxury SUVs That Are a Good Investment for Retirees4 Affordable Car Brands You Won't Regret Buying in 20257 Overpriced Grocery Items Frugal People Should Quit Buying in 2025How Much Money Is Needed To Be Considered Middle Class in Every State? This article originally appeared on Tax Day Countdown: 6 Last-Minute Tax Savings Tips for College Students Sign in to access your portfolio
Yahoo
07-04-2025
- Business
- Yahoo
9 Tax Tips Every Married Couple Must Know
Getting married changes the way you file your taxes, and not always to your benefit. Many people refer to the marriage tax or marriage penalty, for example. But, depending on whether you file jointly or separately, you can reap benefits by taking advantage of the common tax deductions for married couples. Check Out: Learn More: As you begin a family, you might qualify for additional deductions and credits, such as the earned income tax credit for taxpayers with dependents or children. Understanding this can help you claim every tax credit and benefit for which you qualify. Here's a quick look at tax deductions for married couples. Also see tax breaks for the middle class. Married filers have three filing statuses available: The standard deduction depends on which filing status you use. Choosing the Married Filing Jointly status might be a good choice — even if one spouse is not working — because the IRS extends some tax benefits to joint filers that aren't available to those who file individually. This results in a marriage tax break. For married couples in 2025, the standard deduction has risen to $30,000, which is $800 more than the 2024 deduction. However, even if married Filing Jointly has been your best choice in the past, don't assume it will always be that way. Do the calculations each year to determine whether filing separately or jointly will give you the best tax result. Changes in your personal circumstances or new tax laws might make a new filing status more desirable. What was once a marriage tax break might turn into a reason to file separately or vice versa. Also See: Discover More: Married students can deduct education expenses, but you'll need to file jointly to qualify. The credits you might qualify for are the American opportunity tax credit and the lifetime learning credit. The AOTC is worth up to $2,500 of your qualifying education expenses; because it's refundable, you can get money back if your credit is more than your total tax liability. In order to claim the full AOTC credit in 2025, the IRS stipulates that married taxpayers filing jointly cannot make more as a couple than $160,000. The lifetime learning credit is worth 20% of your first $10,000 in education expenses, up to $2,000 maximum. Explore More: You can also deduct qualifying medical expenses from your taxes. You may claim expenses that exceed 7.5% of your adjusted income. Keep copies of your receipts, and make sure you only claim qualifying expenses. Qualifying expenses can include doctor visits, hospital stays, physician-ordered weight loss treatment programs, prescription glasses and prescription drugs. You might pay a marriage penalty when you file jointly if you and your spouse earn the same amount of income, especially if your earnings are high and you have children. The penalty results from your combined income pushing you into a higher tax bracket. This bump is commonly referred to as the married couple tax. But you might be off the hook for it if one person makes significantly less than the other because tax benefits tend to phase out as income increases — especially if the benefits are related to deductions for children. The Tax Cuts and Jobs Act eliminated the marriage penalty for households in most income brackets, but it could still affect those in higher income brackets. Parents with dependent children might be eligible for the child tax credit. The child tax credit for 2025 is $2,000 per qualifying child, and taxpayers with less tax liability might get the remainder refunded to them. The income threshold at which the tax credit begins to phase out is $400,000 if married filing jointly — $200,000 if married filing separately. The credit for other dependents allows you to claim qualifying expenses for dependent care, even if the dependent doesn't qualify for the child tax credit. You can claim a maximum of $1,050 per year for one dependent. Married tax filers might be eligible for the child and dependent care credit if they paid expenses for the care of a qualifying individual so they could work or look for work. The rules for who can be a qualifying dependent and who can be a care provider are strict. This credit is not available if you file separately. Find Out: You typically must have earned income to qualify for an IRA, but filing jointly lets you open a spousal IRA, allowing the stay-at-home parent to contribute to their retirement savings even if they don't earn money during the year. This is one of the tax loopholes for married couples. The contribution limit for 2024 is $7,000 — or $8,000 if you're 50 or over. You can open either a traditional or Roth IRA, but only traditional IRA contributions are deductible. Despite the tax perks married joint filers receive, filing individually is a better option if it reduces your total tax liability. It can be beneficial when one spouse has a tax liability for which the other spouse doesn't want to be responsible, or if one spouse might have a refund seized due to unpaid child support or another debt. Sometimes it makes sense to file separately, said Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm. 'A joint return means that your finances are linked, so you're both liable for each other's debts, penalties and liabilities,' he said. 'So, if either of you has some financial issues or baggage, then filing separately will better protect your spouse from your bad record, or vice versa.' If you file jointly, you can't later uncouple yourselves to file as married filing separately for that year's tax return. 'On the other hand, if you file separate returns and then realize you should have filed jointly, you can amend your returns to file jointly within three years,' Zimmelman said. A related consideration is whether to take the standard deduction or itemize your deductions. You and your spouse must file the same way — either itemize or take the standard deduction. Carefully consider this option because you might lose some tax deductions and credits. The earned income tax credit is one of the tax breaks for married couples with low income. To qualify without children, you must make less than $25,511 while married filing jointly — but this amount increases with each child you have — and it tops off at $66,819 for three or more children. You can claim previous years' credits if you have not claimed them before by amending those previous years' tax returns. Find Out: Your tax situation is likely to change if you are getting a divorce. Divorcing couples must determine which spouse will claim the child tax credit and the child and dependent care credit, for example. These usually go to the parent who has custody of the child. 'If your child lives with you more than half the year, and you're paying at least 50% of their support, then you should claim them as your dependent,' Zimmelman said. In cases of shared custody and support, you have a few options. 'You might consider alternating every other year who gets to claim them,' he said. Or if you have two children, each parent can decide to claim one child, he said. The IRS considers you to be married if you were lawfully wed on the last day of the tax year. For example, if you tied the knot at any time in the past and were still married on Dec. 31, you were married to your spouse for the entire tax year in the eyes of the IRS. The laws of the state in which you live determine whether you were married or legally separated for the tax year. Even if you're married for the full tax year, the IRS might consider separated couples 'unmarried' for tax purposes if you are not divorced but have a legally binding separation agreement, or if you and your spouse have lived apart for the last six months or more of the tax year. This essentially creates a married filing single status that makes you eligible to file as head of household if you qualify, thereby reducing your tax rate. More From GOBankingRates 6 Used Luxury SUVs That Are a Good Investment for RetireesI'm Retired and Regret Moving to Arizona -- Here's Why How Much Money Is Needed To Be Considered Middle Class in Every State? This article originally appeared on 9 Tax Tips Every Married Couple Must Know Sign in to access your portfolio
