Understanding The 1098-E Student Loan Interest Statement vs 1098-T Tuition Statement
Taxes and interest on student loans can be difficult to decode. This article breaks down and explains the difference between student tax credits and deductions.
A college education is notoriously expensive. Every year, thousands of students shell out huge sums of money to receive a degree.
Fortunately, there's a silver lining to that hefty price tag - getting a discount on your taxes.
The federal government offers tax credits and deductions that can reduce the tax burden for students and parents, but figuring out if you’re eligible can be tricky. Read on to learn about the different tax forms you may receive, and how they can help you save on your taxes.
What is the 1098-E Student Loan Interest Statement?
When you file your taxes, you can deduct various expenses to lower your total tax burden. There are two ways to decrease your taxes: deductions and credits.
A tax credit will lower the total amount of taxes owed, while a tax deduction will lower your taxable income. The lower your taxable income, the lower your taxes. A tax credit is always better than a tax deduction because it has a bigger impact on the amount you ultimately owe.
Borrowers with student loans may receive a 1098-E student loan interest statement, which shows how much total student loan interest they paid during the year. When filing their taxes, they can use the 1098-E form to deduct the student loan interest.
This deduction applies to both federal and private student loans. If you have multiple lenders, you may receive multiple 1098-E forms.
The maximum amount of student loan interest you can deduct is $2,500. Even if the 1098-E form shows that you paid $5,000 in interest, you can still only deduct $2,500.
Parents with private student loans or Parent PLUS loans can also take the deduction, even if the loan was for their child’s education. The deduction can be used for loans taken out for undergraduate, graduate or professional school.
How to be eligible for the student loan interest deduction
If your parents took out loans in their name to pay for your education and you're the one actually making the payments, you can’t take the student loan interest deduction. The loan has to be in your name in order to use the deduction.
If you’re interested in taking this deduction, your parents can refinance the loan in your name. To be eligible for a student loan refinance, you need an excellent credit score, stable employment and reliable income.
There are other requirements for this deduction. For instance, if you’re married, you must file taxes jointly. If you file taxes separately, you are not allowed to claim the deduction. If someone else claims you as a dependent on their taxes, such as a parent, you cannot use this deduction.
As of 2020, the deduction starts to phase out for individuals with an adjusted gross income (AGI) of $70,000 and is eliminated for those with an AGI above $85,000. The deduction phases out for married couples with an AGI of $140,000 and is eliminated for couples with an AGI of $170,000.
Your AGI is not the same as your gross annual income. Look at previous tax returns to find your AGI, specifically on your 1040 tax form, line 8b.
If you’re on the cusp of becoming eligible for this deduction, you can contribute to a traditional IRA or 401(k) to reduce your AGI. You can also talk to a tax professional for more ways to decrease your AGI.
What if I don’t receive the 1098-E form?
In some cases, borrowers who are eligible for this deduction don't receive the 1098-E form. You’re only required to send the form if you paid more than $600 in total loan interest. Just because you don't receive the form doesn't mean you’re ineligible for the deduction.
In this case, you’ll have to manually calculate how much you paid in student loan interest for the year. To figure this out, log onto your account or pull your paper statements. Add up the interest for every lender you have, from January through December. Once you’re done, double-check your results by calling the lender’s customer service department to ask them what the total interest was for the year.
What is the 1098-T Tuition Statement?
The 1098-T tuition statement form shows how much you paid for tuition expenses. It does not include how much you spent on other educational expenses like room and board, books, supplies, lab fees, transportation and more.
Students or parents who receive a 1098-T form can use it to receive either the American Opportunity Tax Credit or the Lifetime Learning Credit. But just because you receive the form doesn’t mean you’re automatically eligible for one of these credits.
The American Opportunity Tax Credit (AOTC) is a maximum annual $2,500 tax credit per eligible student, and is only available for students pursuing an undergraduate degree. If you paid for tuition, books, supplies and fees, you can use this credit to recoup your money.
Individual taxpayers with Modified Adjusted Gross Income (MAGI) of $80,000 or less ($160,000 or less for married taxpayers filing jointly) can claim the full AOTC credit, while those individuals between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing jointly) get reduced AOTC credit, and you can’t claim the AOTC credit if your MAGI is over $90,000 ($180,000 for joint filers).
The Lifetime Learning Credit lets users receive a tax credit for 20% of their first $10,000 of qualified educational expenses or a maximum annual credit of $2,000. This can apply for undergraduate, graduate or professional school.
Individual taxpayers with a Modified Adjusted Gross Income (MAGI) less than $59,000 ($118,000 if married filing jointly) can take the full Lifetime Learning Credit. Individuals with a MAGI between $59,000 and $69,000 ($118,000 and $138,000 if married taxpayers filing jointly) can take a partial credit. If your MAGI is above $69,000 ($138,000 for joint filers), you can’t claim the Lifetime Learning Credit.
529 Credits and Deductions
If you contribute to your child’s college education with a 529 account, you may be able to deduct those contributions on your taxes. Many states provide tax deductions or tax credits for 529 contributions. You can also take the deduction if you contribute to a 529 account for someone other than your child, including yourself, your spouse or someone else.
Disclaimer: This material has been prepared for informational and educational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or other advice. You should consult your own tax, legal and accounting advisors first.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.
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