How Does My Modified Adjusted Gross Income (MAGI) Affect Deductions?

Your Student Loan Debt Could Impact How Much You Can Deduct On Your Taxes

Retirement Plan
Kick Images/Photodisc/Getty Images

The period from January through April can sometimes be filled with financial angst surrounding the factors associated with paying for college. Parents and high school students who completed the early FAFSA  are comparing their financial aid award letters to decipher the true costs of attending a particular college. College graduates are grappling with the realities of trying to pay off their student loans.

And everyone, of course, is struggling with the need to complete their federal income tax returns.

Despite all the negative press surrounding the issue, one of the few positives of student loan debt is you can deduct the interest you paid from your federal income taxes. For most taxpayers this represents a huge tax break, but for some borrowers, particularly those who are higher earners, that benefit can disappear based on something known as the Modified Adjusted Gross Income (MAGI).

What is A Modified Adjusted Gross Income?

When completing your federal income tax return, two terms that you will encounter are Adjusted Gross Income (AGI) and Modified Adjusted Gross Income, or MAGI. Your AGI is generally calculated by finding your household income and making certain adjustments. Itemized deductions and other credits are typically not considered.

The MAGI, on the other hand, is used by the Internal Revenue Service to determine whether or not you are eligible for certain deductions, tax credits or retirement plans.

Your MAGI is calculated by taking the AGI and adding any tax-deductible interest you may have.

How Much Can I Deduct for My Student Loan Interest?

If you paid interest on your student loans in the previous tax year, you can deduct up to $2,500 in interest payments under the federal student loan interest deduction.

You can claim this deduction as an adjustment to income, so you won't need to itemize your deductions. This helps you because it lowers how much income the government will tax, saving you money.

Student loan interest is defined as being interest you paid during the tax year in question on a qualified student loan. It includes both required and voluntarily pre-paid interest payments. The deduction is gradually reduced and eventually eliminated when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.

You can only claim the deduction if all of the following apply:

  • Your filing status isn't married filing separately.
  • Your MAGI is less than a specified amount which is set annually.
  • You or your spouse, if filing jointly, cannot be claimed as dependents on someone else's return.

MAGI and Student Loan Interest Deductions

Depending on your tax bracket, the student loan interest deduction can save you hundreds of dollars. You may not be eligible for the full tax deduction, however, depending on your MAGI. If your MAGI is under $65,000, you are eligible for the full deduction of $2,500. If your MAGI falls between $65,000 and $80,000, you qualify for only a portion of the deduction.

If your MAGI is over $80,000, you cannot claim the student loan interest deduction at all.

If your MAGI is too high to qualify for the student loan interest deduction but you are still looking to save money, there are other ways to reduce your debt burden. If you have good credit and plan to pay off your loans with a standard repayment plan rather than an extended payment plan, one option is refinancing your student loan debt. Your income, credit history and employment can all contribute to your refinancing options, but it could cut your interest rates in half, saving you a lot of money over the length of your loan. Depending on your situation and when you opt to refinance your debt, you can save thousands over the terms of your loan. This perk can be significantly more than you would get through the student loan interest deduction.

The student loan interest tax break can be helpful, especially to recent graduates who may have only worked part of the year and carry student loan debt. But for many workers, the tax deduction is not feasible.