Are You Eligible?
You can deduct the interest on student loans you pay if you use the single, head of household, or qualifying widow(er) filing status, or on loans paid by you or your spouse if you filed a joint tax return. You cannot claim the federal deduction for student loan interest if you filed a separate tax return or if you can be claimed as a dependent on someone else’s tax return.
Qualified Student Loans
The student loan must be for you, your spouse, or your dependent. Loans from a qualified employer plan do not count, nor do loans from friends or family. The loan proceeds must be used entirely for qualified educational expenses. You will lose the deduction if you borrowed $10,000 and only used $9,000 for qualified expenses and withdrew the remaining $1,000.
What is the Deduction?
The maximum federal deduction for student loan interest that you can claim is $2,500, and it may be lower. The deduction can be phased out based on your income. The deduction is reduced for taxpayers with modified adjusted gross income (MAGI) within a certain range and eventually eliminated completely if your MAGI is too high.
How to Calculate Your Deduction
Your deduction calculation starts with your modified adjusted gross income (MAGI). This is your adjusted gross income before considering other tax deductions, including the federal deduction for student loan interest you hope to qualify for. You should also add back the following exclusions and deductions if you took any, but these are relatively rare: exclusion for foreign earned income, foreign housing exclusion, exclusion for Puerto Rico or American Samoa residents.
Most taxpayers will find that their modified adjusted gross income is very close to their adjusted gross income. In the case of the federal deduction for student loan interest, you may find that you only need to add back the deduction itself.
Divide your adjusted income by $15,000 ($30,000 if married filing jointly) after calculating. Convert the answer to a decimal with three decimal places. Use 1.000 for the calculation if the answer is greater than 1.000. If it is less than 1.000, use it as is. Then multiply the interest paid on your student loans up to $2,500 by the decimal. The answer will be $2,500 or less.
You won’t have to sift through all of your student loan data for the year, trying to track the amount of interest you paid. Your lender should send you a 1098-E form sometime after the start of the year. The amount of interest you paid will be reported in box 1 of the 2021 version of the form.
Frequently Asked Questions (FAQs)
What is the maximum federal student loan interest deduction?
The maximum amount you can deduct for the year will be $2,500 even if you paid more interest on your student loans.
Can parents deduct student loan interest if they helped pay it?
Parents cannot claim the deduction on their taxes if they helped their child pay off student loans. The student is the borrower, and their information appears on the loan documentation, making them the actual owner of the debt.
Source: https://www.thebalancemoney.com/student-loan-interest-deduction-3193022
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