If you’re one of the 42 million Americans who have student loan debt, you could be missing out on a key tax rule this season that helps increase savings.
Between evolving repayment programs and changing tax polices, it’s not surprising there’s confusion. According to an expert there’s one big mistake that can impact how much you owe or get back in taxes.
How the Student Loan Interest Deduction Really Works
The biggest mistake student loan borrowers make at tax time is misunderstanding how the student loan interest deduction actually works — or forgetting to claim it altogether, according to Peter Diamond, a federally licensed tax expert with 20 years of experience who has prepared over 5,000 tax returns.
“Many borrowers assume that deducting student loan interest is a dollar-for-dollar tax credit, but it isn’t,” he explains. “A deduction reduces your taxable income, not your tax bill directly and that distinction matters.”
Diamond gave the example of deducting $1,000 in student loan interest in the 22% federal tax bracket. “Your real tax savings are about $220, not $1,000,” he explained.
While it’s still meaningful, expectations should match reality.
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Income Limits Could Disqualify You
Another factor take note of is income limits that phase out eligibility, which can surprise higher earners who assume they automatically qualify.
“Because of this, some borrowers either miss the deduction entirely or misunderstand why they can’t claim it,” Diamond said.
Every legitimate deduction is worth claiming, even if the benefit is smaller than people expect. “Make sure you receive your Form 1098-E from your lender, verify eligibility based on income limits, and include it when filing,” Diamond said. “While it won’t eliminate your tax bill, it’s one of those incremental advantages that add up over time — and smart taxpayers don’t leave money on the table.”
The Smartest Ways To Use Your Tax Refund
Wondering how to utilize your tax refund to stay on track financially? There are a few things you can do, according to Marc Butler, financial advisor and author of “Master Your Money, Secure Your Future.”
“Use it as an opportunity to pay off high-interest credit card debt, boost emergency savings, or invest,” he said. “Doing one or more of these actions will ensure your tax refund doesn’t just disappear, but instead becomes a tool for building financial security and confidence.”
If you do get a refund, saving 80% of it is typically recommended, according to Eric Mangold, CWS, founder of Argosy Wealth Management. “This way, you get a small splurge while also saving for your own future,” he said. “It’s not super exciting, but it sure can make an impact on your wealth building.”
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This article originally appeared on GOBankingRates.com: Expert Reveals the One Thing Student Loan Borrowers Get Wrong About Taxes
