Is Student Loan Interest Tax Deductible?

Student loan interest deduction is a Federal policy that allows eligible borrowers to deduct up to $2500 from their taxable income. The deduction is gradually reduced and eventually phased out when your modified adjusted gross income (MAGI) reaches the annual limit for the fiscal year.

The student loan tax deduction lowers the taxable income, quite similar to other forms of deductions. For instance, you can decrease your taxes, or raise the tax refund you get by at least $550 if you were within the 22% tax range and claim a deduction of $2,500. This decreases your adjusted gross income (AGI), thus allowing you to pay lower taxes. The lower AGI will also directly affect your eligibility for various additional deductions and tax credits.

Let’s say your total income for the financial year was $50,000 and you’re eligible for the $2,500 bracket. When you file the income tax, you can show the taxable income as $47,500 and not $50,0000.

Note that student loan tax deduction is shown as an adjustment to income, hence you aren’t required to itemize the deductions on the IRS form.

Eligibility

First, to qualify as a student loan according to the IRS, the amount must have been funded to meet educational expenses redeemed by yourself, your spouse, or someone solely dependent on you.

Further, to qualify for the student loan interest deduction program you must meet the below parameters:

- The loan must be used to pay the expenses of academics wherein the borrower is enrolled in a certificate, degree, or any other accredited program at least part-time.

- You’ve been paying the required interest without a miss on the qualified loan for the financial year.

- You’re legally obligated to repay the student loan.

- You’re not filing the returns separately while being married.

- Your annual income is less than or equal to the amount set by the IRS.

- You or your partner can’t claim dependency on else’s return if you’re filing the deduction jointly.

- Your annual income must be less than $85,000 if you’re filing individually and less than $170,000 if filing jointly for a partial deduction and no more than $70,000 and $140,000 for a full deduction.

How To Do It?

For the financial year 2019, the last date to file your taxes is April 15th, 2020. You can do it on your own or work with a tax consultant. In case you have a straightforward income source, you can use any tax software available online.

If you had already paid student loan interest amounting to more than $600 for the financial year, you’ll receive a 1098-E Form which shows the total interest paid during the year. If the interest paid was less than $600, you need to ask the lender to send you a copy of the interest payments. Once you have the applicable details, you can enter them on line 33 of Form 1040.

Calculation

Calculating the tax deduction is rather straightforward. For example, if you’re an individual filer with a Modified Adjusted Gross Income of $72,000 for the year 2019, the total interest you paid on the student loan throughout the year amounted to $1,800. Now, based on the criteria, your total income exceeds the lowest value of $70,000 for a full deduction.

In this case, you must calculate it partially:

We hope you have a better idea of calculating deductible taxes after reading. In case you get stuck, we recommend seeking the assistance of a qualified tax professional.