Is student loan interest a tax credit or deduction?
Updated on October 31, 2019
When Americans take out student loans, they’re often aware that the interest can produce tax benefits. However, the specifics of these advantages aren’t always clear. You may wonder if the loan provides a deduction or credit. Furthermore, what is the real meaning of this difference, and how will it affect you?
The tax benefit of student loan interest is a deduction. It will probably reduce your taxes substantially if you work full time and don’t already have plenty of other deductions. On the other hand, it isn’t very helpful for people who have little to no taxable earnings.
Deductions are different from credits because they decrease your total taxable income rather than directly reducing the actual amount of taxes that you must pay. Unlike refundable credits such as the Earned Income Credit, a federal tax deduction can’t be refunded to your bank account in cash.
Nevertheless, it could increase the size of your annual refund and/or minimize weekly payroll withholdings. You may subtract a maximum of $2,500 in student loan interest every year. This reduction helps people with private and/or government-backed loans. You can also claim it if you borrow money to fund a dependent’s education.
Generally, you’ll benefit from this tax policy to a greater extent as your income rises. You can maximize the advantages by obtaining a deferment while you’re unemployed or underemployed and making payments when you have more substantial earnings. Talk to a qualified accountant if you have any concerns about tax code compliance.
The difference between a deduction and a credit means that the interest on educational borrowing still costs you money. Nonetheless, a reduction in federal income taxes offsets a portion of this expense. Some state governments uphold policies that add to the benefits; they permit residents to deduct this interest from state taxes.
To sum it up, the IRS allows borrowers to reduce their taxable earnings when they pay interest on educational loans. Student Loanify can help you simplify and reduce payments while avoiding a harmful student loan default. Please explore our website to learn more about income-driven repayment plans, debt forgiveness and other options.