Student loan interest deductions can partially reduce the interest paid on student loans each year. For example, if your average student loan debt is $34,000 and the standard interest rate is 4.8%, you will need to pay approximately $1,500 per year.
Student Loans That Qualify
For the profit of you, your partner, or your dependents, the loan must be a capable student loan. Therefore, loans from capable employers are not counted. In addition, personal loans from family and friends are not counted.
All loan proceeds must be used for certified training expenses. For example, if you borrow $10,000, spend only $9,000 on eligible expenses, and then “cash-out” the remaining $1,000, you will lose the deduction.
Qualified education expenses include:
- Books, supplies, and equipment
- Room and board
How Much Is the Deduction:
Starting in 2020, the maximum interest deduction for student loans you can apply for is $2,500, which may be less. Your income may limit it. The deduction will be reduced for taxpayers whose adjusted gross income (MAGI) changes during a specific phase-out period. If the MAGI is too high, it will ultimately be canceled entirely.
The Student Loan Interest Deduction Act of 2019 aims to increase the deduction submitted to Congress in June 2019 to US$5,000, or US$10,000 for married taxpayers declared jointly. Unfortunately, though, that bill stopped in the House Committee by Means and Methods.
Student Loan Interest Deduction Phase-Outs:
The phase-out ranges for this tax credit depending on your filing status. As of the tax year 2020, the return you would file in 2021, they were:
|Filing Status||Phase-out Begins||Phase-out Ends|
|Married Filing Jointly||$140,000||$170,000|
|Head of Household||$70,000||$85,000|
These figures are corrected for the increase and may change marginally from year to year. The IRS usually declares increase changes at the end of the fiscal year. As of November 2020, these thresholds are precise.
If the MAGI is below the gradual activation threshold, you can deduct up to $2,500 in student loans or the interest you paid, whichever is lower. If MAGI is within the scope of the phase-out, the restrictions will be distributed proportionally. So, for example, if you are single, it might be between $70,000 and $85,000.
Eligibility for the student loan interest deduction
If your adjusted gross income (MAGI) surpasses specific limits, you will not be able to obtain student loan interest deductions. For most people, adjusted gross income (MAGI) is the adjusted gross income (AGI) before adjusting student loan interest payments.
The modified adjusted gross income limits for the 2019 tax year were:
- $170,000 if married and filing a joint return.
- $85,000 if single, head of household, or qualifying widow.
Additionally, income limits, you can’t claim the deduction if:
- You or your mate are not legitimately liable for repaying the loan. (you’re making payments on a loan that your child took out in their name, for example)
- You’re married and filing separate returns.
- Your parent or another relative claims you as a dependent on their taxes.
Find out how much interest you paid.
To find out how much interest you paid on student loans in the current fiscal year, please view Form 1098-E, Student Loan Interest Statement from Loan Facilities. Loan service providers that charge you at least $600 in interest must submit Form 1098-E electronically or by post by January 31st.
If you paid at least $600 in interest through the current fiscal year but paid to multiple service providers, you can still request Form 1098-E from each service provider, even if the interest charged by each service provider is less than $600. Likewise, if your student loan interest is less than $600, you can contact each service to determine the correct amount of interest paid through the fiscal year.
Find out how much interest you paid.
For the amount of interest paid on student loans this fiscal year, please refer to Form 1098-E, Student Loan Interest Statement for Loan Facilities. Loan service providers that require at least $600 in interest must submit Form 1098-E electronically or by post by January 31st.
Suppose you paid at least $600 in interest during the current fiscal year but paid to multiple service providers. In that case, you can still appeal Form 1098-E from each service provider, even if the interest charged by each service provider is less than $600. Likewise, if your student loan interest is less than $600, you can contact each service to find the correct amount of interest paid during the fiscal year.
What qualifies for the deduction
If the loan is only used to pay you, your spouse, or dependents for a proper education while attending a qualified school, the interest paid is usually a student loan. Therefore, it can deduct the interest. Loans from relatives and employers are not deductible.
Qualified educational expenses include:
- College tuition and fees
- Textbooks, supplies, and equipment
- Room, board, and other living expenses
- Other essential expenditures like transportation
If you are allowed to participate in the student support program governed by the U.S. Department of Education, universities, colleges, and vocational schools are qualified schools.
Documents you need to file your tax return.
There are the documents you’ll require to file your tax return and argue your deduction:
- W-2: If you paid income tax for your work, you need each employer to provide a W-2 to file your tax return correctly. It would help if you also had a taxable scholarship, bursary, or W-2 from a tuition assistance provider.
- 1098-E: To apply for a student loan interest deduction, obtain a 1098-E from the loan service provider you paid so that you can record the interest you paid during the fiscal year.
- 1098-T: To apply for the U.S. Opportunity Tax Credit or Lifelong Learning Credit, you need the 1098-T form and the tuition report provided by the school.
The highest deduction is $2,500. Therefore, taxable income is usually minus the amount of student loan interest paid for that fiscal year, or $2,500, whichever is lower.
Please note that as income approaches the total suitability limit, deductions up to $2,500 will be phased out. Therefore, if your income is near your suitability limit, you may have paid $2,750 in interest, but you can only adjust your income to $1,250.