Many college graduates have to pay off their student loans for years after they finish school. The process could take 10 to 20 years. While you cannot deduct all of your student loan payments from your taxable income, you can deduct the interest portion of this debt. Depending on the size of your loan payments and your current income, you could be able to deduct as much as $2,500. The ultimate goal for those with student loans is to pay them off, but the interest rate deduction will lower your tax burden while you are still paying off your loan.
The student loan interest deduction is one of the more straightforward tax deductions to claim on your tax return. It is an “above the line” deduction, which means you may claim it as an income adjustment rather than an expense. You attach a required form from your lender and enter the information for the deduction right on your 1040. You do not have to itemize deductions or make any other complicated calculations.
The process of claiming a student loan interest deduction is simple, but you need to be sure you qualify.
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What Is Student Loan Interest Deduction?
A student loan interest deduction is a specific amount of student loan interest you can deduct from your taxable income. You’re able to claim any interest you paid on qualifying student loans during the fiscal year. For example, if you made monthly student loan payments of $600 that included $500 in principle and $100 in interest, the total amount you can claim for the federal student loan interest deduction would be $100 times 12 months, or $1,200.
This deduction is available to all qualifying student loan holders regardless of how they file their taxes. Taxpayers have to choose between claiming the standard deduction on Form 1040 or using Schedule A for itemized deductions.
For most special deductions, you need to itemize with Schedule A, which requires extra calculations and paperwork. However, this is not the case for the student loan interest deduction. You claim this deduction as an adjustment to income on Form 1040, and you can claim it in addition to the standard deduction.
Who Qualifies for the Student Loan Interest Deduction?
Some loans qualify for the student loan interest deduction, while others do not. The loan must be eligible, and you, as the taxpayer, need to meet specific criteria before you claim this deduction.
- The loan needs to be for a degree, diploma, or certificate program at an accredited private or public postsecondary institution. The IRS has information about eligible institutions on its website.
- Only loans for full-time or half-time students qualify. You need to attend school at least half time to claim the deduction.
- Some private loans, including loans from family members or non-official third parties, do not qualify for the deduction.
- The loan must be for tuition or other qualifying educational expenses, including books, supplies, equipment, educational fees, and additional necessary costs. You do not qualify for the deduction if you use any portion of the loan for non-qualifying expenses.
- The taxpayer has to be the legally obligated borrower. If you obtain the loan for a spouse or child, you may claim the deduction if your name is on the paperwork as the borrower. However, if your dependant is the legally obligated borrower, you cannot claim a deduction, even if you help them make payments on the loan. They can claim the deduction if their name is on the loan.
- If you are married, filing separately, you cannot claim this deduction.
- Your modified adjusted gross income (MAGI) must be below the maximum, which the IRS sets annually. Current limits are $85,000 for single filers and $170,000 for joint filers. The deduction starts to phase out at $70,000 for single filers and $140,000 for joint filers. If your income is between this amount and the maximum, you can get a partial deduction.
The IRS has a worksheet you can use to see if you meet all the requirements to claim the student loan interest deduction.
Are Student Loan Payments Deductible?
The student loan payments themselves are not tax-deductible. You can only claim the interest portion of these debts when taking this deduction. In some cases, such as when the deduction allows you to drop into a lower income tax bracket, the loan interest deduction can be significant. Depending on your income, the interest deduction could lead to a tax refund.
While the student loan payments on principal are not tax deductible, they help you qualify for interest deductions.
Student Loan Interest Deduction Limit
There is a limit to how much you may deduct. Currently, you can claim up to $2,500 per year. This amount is the maximum per tax return. If you are married, filing jointly, you can still only claim $2,500, even if both of you have separate student loans. Single filers who make between $70,000 and $85,000 and joint filers who make between $140,000 and $170,00 may claim a portion of the $2,500.
Student Loan Interest Deduction Form
Your student loan servicer will send you Form 1098-E. To get this form, you need to have paid at least $600 in interest on your student loan during the fiscal year. You may get this document electronically or through the mail. If you do not receive it, contact your loan servicer.
How to Calculate Student Loan Interest Deduction
The first step in calculating your student loan interest deduction is coming up with your modified adjusted gross income, or MAGI. Your MAGI is the adjusted gross income (AGI) that you list on Form 1040 before you take out other deductions, such as deductions for retirement account contributions.
You then divide your MAGI by $15,000. If that number is less than one, you multiply it by the interest you paid up to $2,500. The amount of interest paid during the fiscal year is in Box 1 of Form 1098-E, which you will get from your lender.
If the number that you get when dividing your MAGI by $15,000 is more than one, you multiply your interest by one.
The student loan interest tax deduction is accessible and requires minimal paperwork, but there are also other benefits for education-related spending. For example, you may be able to claim hardship so that the IRS does not garnish your tax return or take part in a repayment plan that could make your student loan payments more manageable.
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