Can I deduct my student loan interest expenses?
Although non-residents are ineligible for the education credits associated with their tuition, they are potentially able to deduct interest expenses associated with any student loans. The student loan interest deduction is available to residents and non-residents as long as the criteria for taking this deduction is met. Below, we have described the general criteria and a few nuances specific to international students who will be filing a non-resident return.
The Loan Must Be Used for Qualified Education Expenses
Student loan must be considered “qualified” by the IRS. This means that the interest is paid during the year on a loan which was taken out solely to pay for education expenses.
One common misconception is that the loan must be from a US-based lender. This is not true. Even if you borrow money from an international lender, such as our friends over at Prodigy Finance, your interest is still deductible. You just might need to do a bit more digging to find the eligible amount. Since only US-based lenders issue tax form 1098-E, you will need to find an alternative report that details the exact amount of interest that you paid.
Married Non-Residents Taxpayers are Ineligible
Another qualification for students is their filing status. To take this deduction, you cannot file under status “married filing separately.” This is a complication for married individuals who are filing as a ‘non-resident’ because their filing status will generally be “other married nonresident alien” since filing jointly is not available to non-residents. This filing status is treated the same as a “married filing separate” return that a tax ‘resident’ might file, implying the student loan interest deduction is not allowed for married non-resident filers.
The Student Loan Interest Deduction Has Limitations
The unfortunate part, even if you are eligible, is that the tax savings for this deduction are often less than expected. That’s because there are two important limitations on the deduction amount:
There are income levels at which the deduction phases out, meaning if you earn too much you might not be able to deduct any interest payments on your tax return. For single non-residents, in 2018 it starts at income of $65,000 and completely phases out at $80,000. These amounts in 2019 will increase to $75,000 and completely phase out at $85,000.
The total interest that can be deducted is also capped at the lesser of $2,500 or the amount of interest you actually paid.That means, even if you paid thousands of dollars in interest that year, the most you can deduct on your tax return is $2,500, and that’s only if you are below the income phaseouts listed in #1 above.
The good news is many international students can still generate tax savings from their student loan interest expenses. Even if you are borrowing from an international lender, that interest is deductible. However, this deduction has all sorts of limitations, and married non-resident taxpayers might not qualify at all.
Filing taxes as a non-US citizen are complex enough, and this deduction adds to that, so make sure to consult with a tax service like Visor that has expertise in non-resident tax filings.
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