You Can Deduct up to $2,500 of Student Loan Interest

UPDATED FOR 2021

If you’re paying down a student loan, you can deduct up to $2,500 of the interest on your tax return – and you don’t even have to itemize to get that deduction. And while there are limits how much you can deduct, millions of  Americans can benefit from this valuable “above-the-line” deduction.

 
“Above-the-line” deductions reduce your adjusted gross income (AGI), which helps make you eligible for even more tax breaks. Plus, you can take above-the-line deductions on top of the standard deduction or itemized deductions. 

You Probably Paid Student Loan Interest in 2020

Despite the pandemic pause on student loans, you probably did pay some interest in the beginning of 2020. The pause started on March 13, 2020... so if you made payments before then, you paid some interest.

Plus, if you had any private student loans, you may not have gotten a pandemic break. And interest on those loans counts for this deduction, too.

So can you take this deduction on your 2020 taxes (the ones you're filing in 2021)? Let’s take a look at the requirements.

1. MAGI (modified adjusted gross income)

When it comes to taking deductions, the IRS likes to set up a bunch of hoops to jump through. The first is figuring out your MAGI.

MAGI equals your AGI (adjusted gross income) before you deduct the student loan interest. To qualify for the full student loan interest deduction, your MAGI must be less than $70,000 (or $140,000 if you file as Married Filing Jointly).

The deduction starts to shrink if your income is higher than that, and phases out completely if you earned more than $85,000 (or $170,000 if you file as Married Filing Jointly).

2. Your filing status

The only filing status you cannot use and still take this deduction is Married Filing Separately.

You also can't take this deduction if you're claimed as a dependent on someone else's tax return.

3. Loan details

Your student loan has to cover only qualified education expenses such as:

  • tuition
  • fees
  • room and board
  • books
  • supplies
  • equipment
  • transportation

Also, you have to be the one legally responsible for the loan - meaning you're the one who signed the loan docs. So if you're making the payments on someone else's student loan - even if it's your kid  - you can't take this deduction.

Finally, it has to be an official student loan. So money you borrowed from family or friends - even if you're paying it back with interest - doesn't count here. And neither do loans from qualified employer plans.

4. Student details

The student involved in the loan has to be you, your spouse, or your dependent. 

And that student has to have been enrolled at least half-time in a program leading to a degree, certificate, or other “recognized education credential” when the expenses were paid.

5. The timing

You can take this deduction the whole time your student loan is outstanding and you’re making interest payments.

Where to find how much student loan interest you paid

You’ll find the amount of student loan interest you paid for the year on the Form 1098-E you get from your lender. If you paid at least $600 interest to a single lender, they have to provide the form. And if you have multiple loans with different lenders, you may get a bunch of Form 1098-Es.

So what if you paid less than $600? Contact your loan servicer to find out how much interest you paid. If you have online access to your student loan account, you may be able to find the amount of interest paid there. You don't need a 1098-E to take the deduction.

The deduction phase-out math

If your MAGI is under $70,000 (or $140,000 on joint returns), you get 100% of the deduction, which is the amount of interest – up to $2,500 – you paid on your student loan. If your MAGI is $85,000 or more ($170,000 or more on joint returns), you make too much money to take this deduction.

If your MAGI falls somewhere in the middle, you’re in the phase-out zone, which means you get to take only a portion of the deduction. And there is some math involved. If you’re using tax prep software, it will do the math for you. Otherwise, here’s how to do the calculation.

  • The numerator of your phase-out fraction equals your MAGI minus the beginning phase-out number ($70,000 or $140,000 depending on your filing status).
  • The denominator equals $15,000 ($30,000 if filing a joint return).
  • Once you have your phase-out fraction, you multiply that by the student loan interest you paid (up to $2,500) to get your deduction reduction.
  • Take the deduction reduction and subtract it from the amount of interest you paid.

Here’s an examples:

Example A: Jenna files as single. They paid $2,000 in student loan interest, and has MAGI of $73,000. Jenna’s calculation looks like this:

$73,000-$70,000

----------------------   X $2,000 = $400

$15,000

$2,000 - $400 = $1,600

Jenna’s deduction reduction came to $400, so their student loan interest deduction is $1,600.

That’s the student loan interest deduction in a nutshell. For more detailed information about the student loan interest deduction, visit the IRS website. 

Have questions about your student loan interest deduction? Or any other tax questions? Feel free to ask!

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