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% 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.
1. 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 an overachiever who is making student loan payments while still in school, you can take this deduction too. It’s not just for graduates.
And 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.
Your income and other factors can help you determine whether the deduction or credit will save you more, but in general, credits are better than deductions. Deductions lower your taxable income, while credits reduce the amount of tax you pay.
2. 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% 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.
3. 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.
4. Do I have to pay taxes on my scholarships?
You don’t have to pay taxes on scholarship or fellowship money that you use toward tuition, fees and equipment or books required for coursework. If your entire scholarship is nontaxable, you don’t have to report it on your return.
Any portion of those funds used for room and board, research, travel or optional equipment is taxable, though. You’ll report it as part of your gross income.
5. How do I file a tax return?
The IRS hasn’t announced when it will begin accepting tax returns. The tax filing deadline is Tuesday, April 17, 2018.
It’s easiest for most students and grads to file using online tax software. These programs walk you through each section of your return and help you decide which education deduction or credit will save you the most money.
NerdWallet’s guide to preparing and filing taxes online can help you choose a provider. If your return is more complicated, most companies offer more robust versions of their software for about $35.
6. What documents do I need to file my taxes?
To fill out your tax form accurately, you’ll need:
- Form W-2: A wage and tax statement from your employer
- Form 1098-T: A tuition statement from your school, if you’re a student
- Form 1098-E: A student loan interest statement, if you paid interest on your student loans in the past year. Grads who paid more than $600 in interest in 2016 automatically received this form in the mail or by email. Those who paid less can still deduct the interest. Ask your student loan servicer to send you the document.
Throughout the year, save your receipts for educational expenses, such as tuition and books, and records of taxable scholarships or fellowships. You’ll need them to accurately report the amounts on your tax return.
7. I go to school out of state. Do I have to file in both states?
If you have a job and pay income tax while you’re in school, you’ll most likely have to file returns both in your home state and the state where you study. Laws vary, but the tax software or an accounting professional can let you know where you need to file.
8. What if I made a mistake when I submitted my tax forms?
The IRS will likely catch mathematical errors when it processes your return. The agency will also contact you if your return is missing any information.
If you didn’t claim all of your income or forgot to claim a credit or deduction, you can file an amended return. Send it in within three years of the date you originally filed or within two years of the date you paid the tax, whichever is later.
Remember that if you choose to use tax software or hire an accountant, you’ll have the opportunity to ask questions. It’s better to get guidance while you’re completing your return than to submit it when you’re unsure and then have to amend it later.