You might have noticed that when you repay student loans, you are not just paying down the original balance; you are also paying the interest too. This is the student loan interest that you might be paying. The student loan interest deduction allows you to subtract your interest payments from your taxable income. The student loan interest deduction lets you deduct any interest actually paid, not just accumulated, on a student loan that you might have taken, during the calendar year, provided some conditions are met. Maximum deduction that you can avail is $2500 and is subject to some income limitations.
The deduction is “above the line” adjustment; this means that you do not have to itemize this deduction separately, you can avail the student loan interest deduction simultaneously with the standard deduction.
What is Student Loan Interest?
Student loan interest is the interest you pay during the year on a qualified student loan. A qualified student loan can be described as loans that you might have taken to pay only the qualified education expenses that were utilized:
- For you, your spouse, or a person who was your dependent when you took the loan
- For the purpose of education provided during the academic year for an eligible student.
Loans from these sources are excluded from the definition of qualified student loans:
- Loans taken from a related person. This means that private loans taken from family or friends do not qualify for student loans interest deductions.
- Loans taken under any qualified employer plan.
What are Qualified Education Expenses?
Qualified education expenses are the summation of all the expenses that are required to attend an eligible school. The costs include:
- Tuition fees and other fees
- Rooms and boarding
- Books supplies and equipment
- Other necessary expenses like transportation.
How to Claim Student Loan Interest Deduction?
In order to claim the student loan tax deduction you should meet all these requirements:
- Your filing status should not be married filing separately. That means your status may be any status except married filing separately.
- You must be legally obligated to repay the loan. If you are filing a joint return then you and /or your spouse must be the signatories on the loan.
- No one else is claiming you as a dependent.
- You cannot claim the deduction if you make payments for your child, if your child takes out the loan in his own name and is obligatory for that loan, provided you do not claim him as a dependent.
- You, your spouse or your dependent is enrolled at least half-time in a program leading to a degree, certificate or other recognized educational credential at an eligible educational institution.
- You have paid interest on a qualified loan.
- You have paid or incurred within a reasonable period of time before or after you took out the loan.
If you are married and filing jointly you can claim the student loan deductions under the following circumstances:
- You can deduct the full amount of $2500, provided your modified adjusted gross income or (AGI) is not more than $135,000.
- Your deduction is moderately reduced if your modified adjusted gross income exceeds more than $135,000 but is less than $165,000.
- You cannot claim student loan interest deduction if your AGI is $165,000 or more.
If you are filling as single, head of household or qualifying widow or widower then you can claim the student loan deductions if:
- Your modified AGI is $65,000 or less. In that case, you can claim the full $2500 deduction.
- Your deduction will be moderately reduced if your AGI is between $65,000 and $80,000.
- You cannot claim a student loan interest deduction if your modified AGI is $80,000 or above.
- If you are filling as a qualifying widow(er), you cannot claim the deduction for your deceased spouse. However, you can use the married filing jointly tax schedule.
What are the Limits of a Student Loan Interest Deduction?
The maximum amount of student loan deduction you can claim is limited to $2500 as of the tax year 2018. The deduction is limited to your modified AGI.
Modified adjusted gross income or MAGI is your adjusted gross income (AGI) with the addition of some deductions. Your AGI is your gross income excluding any permissible deductions, such as retirement plan contributions, student loan interest and health insurance premiums paid by self-employed individuals.
To determine your MAGI you need to follow the following steps:
- First, ascertain your gross income for the year. Your gross income will include anything you have earned from wages, interests, dividends, rental incomes, capital gains, and business income.
- From your gross income, you can derive your adjusted gross income or AGI by deducting your gross income allowable deductions from the Form 1040.
- To arrive at MAGI you now have to add back to your AGI the values of some deductions. Often your MAGI and AGI will be identical as they most of you might not have these deductions, however, if you have student interest, self- employment tax, IRA contributions and qualified tuition expenses then your MAGI and AGI will show a different value. You will also be required to add back some of the exclusions and deductions like foreign earned income exclusions, foreign housing exclusions, foreign housing deductions and income exclusions for residents of American Samoa or Puerto Rico. These are, however, quite uncommon but in case you have availed any of them you need to add them back to arrive at the MAGI.
If your MAGI is under the threshold where the phase-out begins, you can claim the entire permissible amount of $2500, in student loan interest or the actual amount of interest that you paid, whichever is less. If your MAGI falls within the phase-out range then your limited is gradually prorated.
You will require a Firm 1098-E or student loan interest statement, if you have paid interest on your student loans in the past year, and include it along with your tax returns while you file your tax. If you have paid more than $600 in interest in the previous year, you will automatically receive this form in your email or by physical mail. If you have paid less than $600 then also you can deduct the interest, for this, you need to ask your student loan provider to provide you the requisite document.
Although the student loan deductions remain unchanged after the passing of the Tax Cuts and Jobs Act of 2017 (TCJA) the IRS has announced that it will issue a new tax form for the 2018 tax year in order to accommodate other changes made by the TCJA. This can influence how you claim this deduction if you are eligible. You might require the help of a tax professional or reputed tax preparation software to relieve you from these headaches.