How Can I Get the Most Out of My Tax Return?July 6, 2020
If you haven’t already filed your 2019 taxes, you don’t have much more time. The deadline to file your federal taxes this year has been extended to July 15, 2020, due to the COVID-19 pandemic. So if you still need to file this year, or if you’re looking for ways to maximize your tax return for the future, here are some important things to keep in mind.
Tax Implications of Student Loans
If you have student loans that you have been making payments on, there is a major benefit you may be able to take advantage of.
Student Loan Interest Deduction
Each year you pay back your student loans, you may be eligible to deduct student loan interest, up to $2,500, off your taxable income. Here are the important things to know about the deduction:
- The deduction is only for the interest portion of your loan payment. Your monthly loan payment consists of paying back the principal of the loan and interest, so you will not be able to deduct your entire loan payment.
- You can take advantage of the deduction whether you have private student loans or federal student loans.
- You do not need to itemize your tax return to take advantage of this deduction. This can be taken in conjunction with the standard deduction on your return. This deduction will lower your income, thereby lowering your tax liability.
- You have to meet income requirements. You are eligible for the deduction if your Modified Adjusted Gross Income (MAGI) was below $70,000 ($140,000 for married couples filing jointly) the previous tax year. You may be eligible to deduct a reduced amount if your income is higher, however, the deduction does not apply once your MAGI is over $85,000 or $170,000 for joint filers.
- You cannot claim this deduction if someone else claims you as a dependent on their tax return.
- The loan must have been taken out for a qualified education expense for you, your spouse, or a person who was a dependent when you borrowed the loan.
How The Tax Deduction Works
A deduction is taken to reduce your income that taxes are assessed on, unlike a credit that reduces your taxes owed. For a simple example of how this works, if your income is $50,000 and you paid $1,000 in student loan interest, you can deduct the full $1,000 and your income would be reduced to $49,000 and taxes would be assessed on that amount. Whereas if you claimed any credits, discussed below, the amount of the credit would be taken off of your taxes owed. If you owe $1,500 in taxes and the credit is $500 you now owe $1,000 in taxes.
It’s important to obtain the tax information from your loan servicer when you are ready to file your return. If you have paid more than $600 in interest, your servicer will most likely automatically provide you the 1098-E form. The form will show the total amount of interest you have paid for the year.
If seeing the amount of interest you have paid gives you a shock, you may want to look into refinancing your student loans. Refinancing is when you obtain a new loan to pay off current student loans and can be a simple process that results in savings. Refinancing may help you obtain a lower interest rate, thereby saving you in interest costs. It can also help you lower your monthly payment. Use our Student Loan Refinance Calculator to see how much you may be able to save.*
Other Ways to Maximize Your Return
If you are looking for other ways to get the most out of your return, check to see if any of these could apply to you:
Education Tax Credits
If you are still in school paying for tuition, you may be eligible to take a tax credit, even if you used student loans to pay the expenses. Here are the two available for 2019 taxes.
American Opportunity Tax Credit
This allows you to take a credit of up to $2,500 per year for four tax years. You must be enrolled in school at least half time and be working towards a degree. Parents who are paying for the college tuition of their dependents can take this credit or the student themselves can take the credit. Make sure to obtain Form 1098-T from the school to show how much tuition has been paid. This credit is not available for graduate students. In addition, there are income requirements to meet.
Lifetime Learning Credit
If you are working towards a college degree or enrolled in courses to help with your career, you may be eligible to take a credit of up to $2,000 per tax year for tuition, fees, books, and supplies. There is no limit on how many years this credit can be taken. There are income requirements to meet for this credit as well.
Save More and Reduce Taxes
If you have an IRA or a Health Savings Account and you did not contribute the maximum amount allowed for the year, the deadline is extended to allow contributions until July 15. The money saved in an IRA and HSA is not subject to federal income taxes. So you are able to save more in these accounts and avoid federal income taxes on your savings.
Hopefully, you can take advantage of some of these savings to get the most out of your tax return. As with any tax advice, make sure to use a reputable program or speak with an experienced tax preparer for your specific situation. The most important thing to remember is to file and pay your federal income taxes by the deadline, July 15, 2020.
*Subject to credit approval. Terms and conditions apply.
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