When you're buried in student loan debt, it doesn't seem fair to be paying taxes. That's why it's important to get as much as you can back with your tax returns. Take advantage of deductions and credits, and if you're fortunate enough to be able to do so, use your returns to pay down a big chunk of your debt. Here's what you should be looking for while filling out your return.
1. Deduct Interest Paid
You can deduct the interest you pay on your debt. At least this way you recoup some of what you spent.
You'll file the deduction as an adjustment to income. The maximum amount you can deduct is $2,500. If you've paid more than $600 in interest in the past year, you should receive form 1098-E from your lender. Box #1 will tell you how much interest you paid.
If you paid less than $600, you'll have to check records to see how much to deduct. There's an income ceiling — after you make $80,000 a year, you're exempt. See the IRS page on this topic.
Are you still in school? I recommend not deferring your interest payment. If you do defer, your lender simply tacks that interest onto the principal of your loan. Then, you end up paying interest on the interest.
2. Deduct Tuition and Fees
This deduction adjusts the amount of income on which you're taxed. It's good for up to $4,000 per year. If you're a dependent on someone else's tax return or you are married and filing separately, you don't qualify. Like the interest deduction, if you earn a certain amount, you're exempt. Also, if you want to claim either of the education tax credits (see "Stay in School" below), you can't claim the Tuition and Fees Deduction.
3. Get the Earned Income Tax Credit
If you qualify for it, get it. The EITC, or EIC, is for those of us with low income. Surprisingly, only about 80% of workers who qualify for the credit claim it. If you're married, don't file separately — this will disqualify you. If you're single, to get this credit you have to make less than $14,820 in a year. If you're married and/or have kids the qualification ceiling goes up.
4. Take on Freelance Work
Not only will freelancing earn you more money towards paying off your debt, you'll also be able to write off a number of expenses. These deductions include work materials, such as a laptop or tablet you use exclusively for freelance writing. You can write off meals and snacks you eat in the course of your workday. You can also write off expenses related directly and indirectly to the space you use for work. Yes it's a hassle, but make sure to document your expenses if you want to qualify for deductions.
5. Stay in School
Is graduation in sight but you're nervous about your post-graduate plans? You may want to stay in school. Here's the logic behind this: College students can be eligible for some great tax breaks:
You can only claim one of these credits. To get the American Opportunity Credit, you have to be at least a part-time student, and you can only claim it for the first four years of college. It's refundable by up to $1,000, meaning you could see that money go right back into your pocket.
The Lifetime Learning Credit applies to the student who wants to continue for more than four years, or go to graduate school.
Combined with the student loan interest deduction, tax credits can save you a nice chunk of change to apply towards paying off your loans. Work a freelance job at the same time, get the freelancer deductions, and now you're talking tax strategy. But know you can't make more than $80,000 a year to get the American Opportunity Credit, and no more than $60,000 to get the Lifetime Learning Credit.
6. Look Into the Business Deduction for Work-Related Education
Here's a scenario. You're a writer and you're going to school to get a degree in English with some sort of writing emphasis. On the side, you do freelance writing to make a little extra cash. You can deduct your education expenses.
Or, your employer can pay for your education and write it off on their taxes. Your degree has to go toward continuing in your employment field, and it can't be a degree toward meeting your employer's minimum educational requirements.
Even if you're on a leave of absence from work, you can still deduct educational expenses.
7. Paying for Child Care? The Child and Dependent Care Credit
You can get a credit of up to $3,000 for one child/dependent, or $6,000 for two children/dependents, per year. You have to be employed or seeking employment. If you're a full-time student, you qualify as being employed. Your income will determine your credit amount, but the nice thing is there is no income ceiling. You must provide your child care provider's information, as they must be a qualifying provider (not your spouse or one of your older kids). The Child and Dependent Care Tax Credit is a nice boost, and combined with the other credits listed here, will definitely help you out come tax time.
8. Get Free Tax Prep
All of this is a lot to take in, and doing your own taxes can be frustrating, especially if you're pressed for resources. Is there a community college in your area? Under the IRS VITA program, low to moderate-income Americans can get tax help from volunteers at community colleges and other locations. Of course there are qualifications you have to meet, and materials you have to bring. You qualify if:
You make $54,000 a year or less
You're elderly or incapable of preparing on your own taxes due to disability
- You speak limited English
Happy tax prep!