How to Deduct Student Loan Interest on Your Taxes
Many people refer to the weeks leading up to April 15 as tax season. However, unlike the holiday season, this season does not necessarily bring good tidings of great joy. Rather, it could leave you struggling with several documents and papers, as you make haste to figure out the tax code, to complete and file your tax returns with the Internal Revenue Service (IRS) before the deadline of April 15.
Unfortunately, not many people have the ability to make sense of the complexities of the tax code. Therefore, ascertaining the tax burdens and benefits that apply specifically to your personal situation could be difficult. As a result, computing the amount of tax you need to pay could become an intimidating activity.
Tax Deduction on Student Loan Interest Paid During the Tax Year
The IRS has enabled homeowners to claim deductions on the mortgage interest they pay for their homes. However, since 1998, the IRS has also allowed taxpayers, who are repaying their student loans, to claim a tax deduction. It enables these individuals to deduct the interest on student loans that they have paid during the tax year.
However, the maximum deduction the IRS provides is $2,500. Therefore, you will only receive $2,500, even if you paid a higher amount of student loan interest. Moreover, you can capitalize on this deduction without having to itemize it. The IRS treats this deduction as an adjustment to the income you report for tax purposes.
Are You Eligible for Claiming the Student Loan Interest Deduction?
To be eligible for claiming this deduction, you will need to meet certain criteria. You can claim the student loan interest deduction
- You file your tax return with one of the following filing statuses:
- Married or,
- Married, filing jointly
- No one else is claiming an exemption for you on their tax returns
- The student is either you, your spouse or your dependent
- You used the student loan to pay qualified education expenses. such as tuition, fees, room and board, books, equipment and necessary travel
- You have borne the qualified education expenses within a reasonable period before or after taking out the student loan via a federal post-secondary education loan program
- Your Modified Adjusted Gross Income (MAGI) is below the upper threshold specified by the IRS:
- If your filing status is single, head of household or qualifying widow(er) – $65,000 to $80,000
- If your filing status is ‘Married, filing jointly’ – $130,000 to $160,000
- You are enrolled at least half-time in a degree program in an eligible educational institution i.e. a college, a university, a vocational school, or another post-secondary educational institution eligible for participation in a student aid program administered by the US Department of Education
- You have not obtained the student loan from someone related to you (e.g. a grandparent, parent or spouse) or through a qualified employer plan
What is the Modified Adjusted Gross Income (MAGI)?
The MAGI denotes the sum of:
- Your Adjusted Gross Income (AGI)
- Your student loan deductions
- Your higher education deductions
- Your foreign income and foreign housing deductions and,
- Your IRA contribution deductions