Federal student loans may be paid off directly or indirectly through a number of incentives devised by the IRS. Some are in the form of tax deductions for both interest and tuition, while others are offered in the form of tax credits. The money saved through tax reductions may be used to pay off your student loan. However, qualifying for these tax programs depend on the total amount of income you make each year.
If you are currently in the process of repaying your federal student loans, you may be eligible for tax deductions. Tax deductions are made based on your Modified Adjusted Gross Income (MAGI). Your MAGI is your gross income that includes wages, tips or any other earned income, minus expenses such as moving expenses, passive losses of income, and rental losses, among others. If your MAGI is less than $60,000 a year and you are not a dependent, you may qualify for a tax deduction of up to $2,500 of your student loan interest. If your MAGI is less than $75,000 but greater than $60,000 a year, your tax deduction may be smaller. Those who make more than $75,000 a year are not eligible for tax deductions this way.
When filing your income tax return, you may be able to deduct expenses that include tuition costs. This is also applicable to spouses and dependents. For those whose MAGI is less than $65,000, $4,000 in tuition expenses may be deducted. Those that earn between $60,000 and $80,000 may qualify for a $2,000 deduction. Deductions in this manner are not available for those earning more than $80,000 a year.
The American Opportunity Credit
This tax credit may be claimed for each year you are enrolled at school. Students must be enrolled at least half-time to qualify, and the credit is only available for the first four years of post-secondary education. For those whose MAGI is less than $80,000, a $2,500 tax credit may be claimed. Those who earn between $80,000 and $90,000 qualify for smaller amounts. Up to 40 percent of the tax credit may be used as a refund if the tax credit exceeds your total tax obligation.
The Lifetime Learing Tax Credit
Like the American Opportunity Credit, this tax credit is aimed at those who are currently enrolled in school. Tax credits are awarded based on borrowed educational expenses, such as student loans. Those whose MAGI is less than $50,000 may receive a $2,000 tax credit, and those whose MAGI is in between $50,000 and $60,000 may receive a reduced tax credit.
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