These days, the average college graduate leaves school with over $20,000 in student loan debt. For graduates of private four-year universities, the average debt load is closer to $40,000. Every year, ballooning student loan debts force hard-working adults into bankruptcy. In this environment, even single graduates with steady jobs and few other expenses are finding it harder and harder to make ends meet.
If your student debts are coming due, you'll need do everything in your power to stay current on these obligations. Once you've fallen behind on your payments, you may be forced to rework your budget in order to remain solvent. Fortunately, there's a little-known tax deduction that may keep your finances afloat until your earning power increases.
This deduction is properly known as the Student Loan Interest Tax Deduction. As a college graduate, it entitles you to deduct student loan interest worth up to $2,500 from your total taxable income. If you earned $40,000 and paid $1,500 in student loan interest last year, this deduction allows you to reduce the value of your total taxable income to $38,500. If you're currently in the 20 percent tax bracket, you'll owe $300 less as a result of this deduction. Importantly, the Student Loan Interest Tax Deduction doesn't prevent you from claiming other tax credits and deductions. As such, it's likely to boost the size of your tax refund substantially.
The Student Loan Interest Tax Deduction also permits you to deduct the full value of your dependents' student loan interest from your own income. This is because the IRS assumes that you're paying off your dependents' student loans. As long as you can claim an adult child as your dependent, you'll be able to use the deduction in this manner. Likewise, the Student Loan Interest Tax Deduction allows you to claim your spouse's student loan interest on a joint tax return. In any case, you'll need to use the Form-1098X provided by your student lender to determine the exact amount of interest that you're entitled to deduct.
The Student Loan Interest Tax Deduction is governed by strict income limits. If you're filing singly, you can deduct up to $2,500 in student loan interest provided that you earned less than $60,000 during the tax year. If your income was between $60,000 and $75,000, you'll be able to deduct between $0 and $2,500 according to the exact amount that you earned.