If you’re paying down a student loan for either you or your child, 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. Yes, there are limits on the amount you can deduct, but many Americans can take advantage of this valuable “above-the-line” deduction.
Can you take this deduction? Let’s take a look at the requirements.
MAGI (modified adjusted gross income)
This number is your AGI before you deduct the student loan interest. To qualify, your MAGI must be less than $80,000.
Your filing status
You can take this deduction whether you file as Single or Head of Household.
Loan details
Your student loan has to cover only qualified education expenses (such as tuition, fees, room and board, and books), and the loan can’t be from a relative or an employer.
Student details
The student involved in the loan has to be you or your dependent. That student has to be enrolled at least half-time in a program leading to a degree, certificate, or other “recognized education credential.”
The timing
You can take this deduction the whole time the student loan is outstanding and you’re making interest payments.
Where to find the amount
You’ll find the amount of student loan interest you paid 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.
The phase-out math
If your MAGI is under $65,000, you get 100% of the deduction, which is the full amount of interest – up to $2,500 – you paid on your student loan. If your MAGI is $80,000 or more, you can’t 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 $65,000. The denominator equals $15,000. 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 reduction, and subtract it from the amount of interest you paid.
Here are some examples.
Example A: Jenna is filing as single. She paid $2,000 in student loan interest, and has MAGI of $73,000. Jenna’s calculation looks like this:
$73,000-$65,000
———————- X $2,000 = $1,066.67
$15,000
$2,000 – $1,066.67 = $933.33
Jenna’s student loan interest deduction is $933.33.
Example B: Ellen, who files as head of household, paid $4,000 in student loan interest in 2016. Her MAGI for the year was $68,000. Her calculation looks like this:
$68,000-$65,000
———————- X $2,500 = $500
$15,000
$2,500 – $500 = $2,000
Ellen’s student loan interest deduction is $2,000. (Remember, the maximum deduction is $2,500.)
That’s the student loan interest deduction in a nutshell. For more detailed information about the student loan interest deduction, visit the IRS website. And if you have any questions, please ask.