Being a student loan awardee is not an easy job. First, you need to go through all the technicalities to apply and get approval for the loan. But as soon as you get the loan, the never-ending battle of 1098-E vs. 1098-T begins.
In the United States, student loans are subjected to tax deduction. In other words, if you haven’t kept a record of your tax record and you are currently filling your taxes, there’s a lot of paper and reading coming right your way.
You may be wondering, why is this?
The tax deduction is included in the act that was signed on December 18th, 2007. This act helped to provide financial support for college students who were out of high school and enrolled in institutions giving higher education, vocational training, or other academic educational activities. To put it simply, student loans fall under Section 221 of the Internal Revenue Code (26 U.S.C. 221), which defines them as deferred tuition programs if their main purpose is to help you pay for your school fees and costs like books, supplies, and living expenses.
So when does this deduction start? According to the Department of Education, they state that you are eligible for this tax benefit beginning from the first day of enrollment of the school.
This means that if you enrolled on September 1, 2011, then your benefit will start from that date (you can use the first day of enrollment as of October 1st). This is all defined on page 9 of this document.
The concept of tax deductions and tax credits
Before diving deep into the 1098 e vs. 1098 t debate, you need to understand two crucial terminologies of the US tax system. Tax deductions mean that you will be charged a certain percentage amount from your total income before the tax is calculated.
When it comes to tax credits, a certain amount will be subtracted from your overall tax burden. For example, if you owe an amount of $500 in taxes, there’s a high probability that you will be charged $100 from the $500 in the name of tax credits. This way, you will only have to pay $400. This is the main difference between deductions and tax credits.
On the other hand, tax deductions are considered a part of your taxable income. This means that before the tax is calculated, a certain percentage of your income will be deducted from it. This is a good thing if you have a higher taxable income because the fewer taxes you pay, the more money you get to keep in your pocket.
However, this is not always the case with tax credits. The only difference between deductions and tax credits is that, when it comes to deductions, part of your income will be deducted before the calculation for each category while tax credits are subtracted directly after calculating all your expenses. At this point, you can see where problems begin regarding 1098 e & 1098 t.
What is the difference between 1098-T and 1098-E?
The foundation of the 1098-E vs. 1098-T is as old as the US taxation system itself. A 1098-E is a verified statement that shows all the data related to your student loan. Like the name of the loan provider, address, contact details, interest paid, etc. are mentioned on the same. The data is then reported to the IRS, which makes your records easier for them to access. A 1098-E is also sent to your tax agency so that they can calculate the taxable income accordingly. However, you are not required to report this information to them if it is less than $600.
There’s another version of 1098-E called the “student loan interest statement” which is sometimes known as 1098-E (L). This form only shows the data related to your student loans and you don’t have to worry about reporting anything on this. You just need to take its help in determining whether you are eligible for an exemption or not because, as mentioned earlier, there are certain criteria that need to be fulfilled for this tax deduction.
A 1098-T, on the other hand, is a statement containing all the relevant details of your education credits and all the related expenses within the tax year. This also allows the students to receive up to $2,000 under Lifetime Learning Credits. However, there are certain criteria that need to be fulfilled for this tax credit as well.
1098-T is sent to the student by the respective school and it also shows the attendance record of your classes within a specific year. In addition to this, it also contains the data regarding any educational expenses that you have paid from your pocket. This means that if you have paid from your own pocket for books, fees, tuition, etc. The 1098-T will contain all this information which you can use to reduce the amount of taxes that you need to pay.
1098-T is sent by the institution or college where you are studying and not by student loan companies like Sallie Mae, Navient Corporation, etc.
1098-E vs 1098-T: What’s the significant difference?
If you are still a student trying to look at your tax returns and file them accordingly, the chances are that you will get both the 1098-E and 1098-T forms.
But remember, the 1098-E is the form with all the information associated with your student loan interest. In other words, 1098-E is the form you need for tax filing. The 1098-T is simply the statement of all the money you have probably spent on your education.
1098-E PROS:
1. If the 1098-E shows that you have paid $600 or more in student loan interest, then it’s good news for you! Because this will be considered as a tax credit. This means that you can deduct $600 from your taxable income and pay fewer taxes.
1098-T PROS:
1. If the 1098-T contains all the information regarding your school fees and other expenses related to education, and if they add up to more than $4,000 then you don’t need to worry about filing your taxes because this form allows you to claim funds under Lifetime Learning Credit.
2. Unlike the student loan interest deduction of 1098-E which is limited to qualified loans with a payment of $600 or more, the student loan interest deduction is unlimited under 1098-T.
3. You can claim deductions on eligible expenses even if you don’t itemize.
4. If the school provides some scholarships to you which include Pell Grants, teaching assistantships, etc., then they must be mentioned on your 1098-T form. The amount of scholarship will not be considered for tax purposes but it will show that you are receiving some sort of financial assistance from your college or university during that particular year.
1098-E CONS:
1. Only qualified loans should come under 1098-T while it’s not necessary with 1098-E (not limited to only qualified loans).
2. You can’t claim Lifetime Learning Credits under 1098-T while the other form (1098-E) allows you to do so.
3. The maximum amount of deduction on student loan interest is $2,500 under 1098-E as compared to $4,000 for this form (1098-T).
4. Only those students who have paid $600 or more in student loans are eligible for tax refunds/credits under 1098-E whereas it’s unlimited under 1098-T.
5. You need a qualified bank account if you want to receive a refund via a direct deposit from your lender.
6. If you don't sign up for an automatic payment plan, you can expect a check in the mail for any refund amount.
7. You must attach your 1098-E form to your tax return if you want to get a deduction on student loan interest (maximum of $2,500).
1098-T CONS:
1. You cannot claim deductions or tax credits under this form (1098-T).
2. If you have changed your job during the year, then it's possible that your lender might have been billed incorrectly for 1098-T reporting. In such a scenario, talk to your employer as they can request a corrected W-2 from them and correct the information on TIN Matching Program System which is used to match up all incoming returns against Social Security Administration’s records.
3. If you have changed jobs at least twice during the year, then there are chances that none of these could be matched properly with SSA records which will result in a delay in getting proper 1099-T forms sent out by lenders.
4. Even if your lender is sending you the 1098-T and it doesn’t show any information regarding scholarships or grants, don’t worry too much about it. You can still claim deductions with other forms such as tuition and fees deduction which is available to all students.
5. The maximum amount of deduction on student loan interest is $2,000 for this form (1098-T) whereas the other one (1098-E) allows up to $2,500.
6. There are chances that you might receive a letter from your college/university or lender saying that they did not report 1098-T information because there wasn't enough room left on the form This means that the 1098-T form was filled by them and they haven't sent it out to you as yet.
7. You can only claim deduction on tuition and related fees if the school has provided scholarships, grants, etc., but doesn’t cover them in 1098-T.
8. If your parents pay your tuition then you cannot claim deductions for that person under this form (1098-T).
How can we get the 1098-E and 1098-T forms?
Kids today believe that they want to know everything about 1098-E vs.1098-T but still forget the most crucial question in this regard? Where are they even going to get the 1098-E and 1098-T forms?
The chances are that you are going to get both the forms through the mail before January. But remember, you will only get the 1098 e-statement/form once you have spent an amount higher than $600 in terms of student loan interest. But this amount varies year by year.
If you don't get it in the mail, then you should ask for them from the company that has provided your student loan. By July 1st of every year, they must send out 1098 e-forms to their borrowers. There is an alternative and that is: You can also download these forms online through schools or lenders' websites.
What if you still face any problems regarding 1098-E vs.1098-T?
The best thing you can do under such circumstances is to talk to a tax adviser who will be able to help you with all such problems related to 1098-e vs 1098-t. If by chance the issue isn’t solved over there then you can also call or visit the IRS office/branch where you should be able to get all your queries solved.
Final note
Some people may think that the taxation system here in the United States is quite strict and hard to track. The truth is, if you aren’t going to keep your financials on track in time, there’s no way you can take benefit of all the tax relaxations you can get by filing everything on time.
If you have taken a student loan as well, there’s no other person in this world who knows the complications of 1098 e and 1098 t statements forms. For example, most people don’t recognize that they can get back a maximum of 2500 USD that they have paid in the name of tax. Remember, kids; everything is not included in the books; you need to figure out some things yourselves.