Deducting interest paid on student loans from your tax bill may seem like a really smart idea, but it comes with a catch. And this may not make it as attractive as you first thought.
Assuming you qualify for the full deduction, the amount you can claim back from the IRS is capped at $2,500. In the grand scheme of things, this is a small amount and it won’t get you very far, especially if you have over $100,000 in student loans.
Earning Too Much
If you’re single and you hit $65,000 in income, this will phase out the amount of money you can claim back on interest. In today’s world, $65,000 for someone with a good career isn’t a whole lot of money. It doesn’t take long before this deduction becomes relatively tiny.
If you are married, you are in an even worse position. For the purposes of assessing whether you can claim a deduction or not, incomes are combined together. If you have two people with good jobs filing jointly, you will be extremely lucky to receive any form of the deduction at all.
For married couples, this phases out at $130,000. And the amount is still capped at $2,500 for the couple as a whole.
And it’s no longer possible for a married couple to file individually in order to get around this. This loophole was closed.
Is it Worth It?
If you can claim this deduction, do so. Just don’t pin your financial hopes on receiving a huge amount of money from the IRS at the end of the year.
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