The Federal Student Loan Interest Deduction
Interest Paid on Student Loans Is Still Tax Deductible
The student loan interest deduction can be claimed "above the line" as an adjustment to income. You can take it without itemizing, or take the standard deduction as well. It's subtracted on line 20 of the "Adjustments to Income" section of Schedule 1 of the 2020 Form 1040.
The end result is that it reduces your adjusted gross income (AGI) so you pay taxes on less, and a lower AGI can directly affect your eligibility for numerous other deductions and tax credits as well.
Are You Eligible?
You can deduct interest on student loans paid by you if you use the single, head of household, or qualifying widow(er) filing status, or by you or your spouse if you file a joint return. You can't claim the student loan interest deduction if you file a separate married return, and you can't take it if you can be claimed as a dependent on someone else's tax return.
You must also be legally obligated to repay the loan. You—or your spouse if you file a joint return—must be the signatories on the loan. You can't claim the deduction if your child takes out the loan in their own name and is the obligor, even if you make the payments for them. Only they can do so—provided, of course, that you're not claiming them as a dependent.
The IRS provides an interactive tool to help taxpayers determine if they're eligible for the student loan interest deduction. It takes about 10 minutes to complete and you'll need your income information, including your AGI, your filing status, and a list of the expenses that the loan or loans paid for.
Student Loans That Qualify
The loan must be a qualified student loan for the benefit of you, your spouse, or your dependent. Loans from a qualified employer plan don't count, nor do private loans from family or friends.
The loan proceeds must be entirely dedicated to qualified education expenses. You'll lose the deduction if you borrow $10,000 but use only $9,000 of it toward qualified expenses and "cash-out" the remaining $1,000.
Qualified education expenses include:
- Room and board
- Books, supplies, and equipment
How Much Is the Deduction?
The maximum student loan interest deduction you can claim is $2,500 as of the 2020 tax year, and it might be less. It can be limited by your income. The deduction is reduced for taxpayers with modified adjusted gross incomes (MAGIs) in a certain phase-out range and is eventually eliminated entirely if your MAGI is too high.
The Student Loan Interest Deduction Act of 2019 aimed to increase the deduction to $5,000, or $10,000 for married taxpayers filing joint returns, when it was introduced to Congress in June 2019. Unfortunately, that bill has stalled in the House Committee on Ways and Means.
Student Loan Interest Deduction Phase-Outs
The phase-out ranges for this tax credit depend on your filing status. As of 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 adjusted for inflation, so they can change slightly year to year. The IRS typically announces inflation adjustments at the end of the tax year. These thresholds were accurate as of November 2020.
You can deduct up to $2,500 in student loan interest or the actual amount of interest you paid, whichever is less, if your MAGI is under the threshold where the phase-out begins. Your limit is prorated if your MAGI falls within the phase-out range—for example, $70,000 to $85,000 if you're single.
Unfortunately, your student loan interest isn't deductible at all if your income is more than the ceiling where the phase-out ends.
How to Calculate Your Deduction
Calculating your deduction begins with your MAGI. This is your all-important adjusted gross income (AGI) before you take other tax deductions into account, including the student loan interest deduction you're hoping to qualify for. You can't deduct this first before calculating your MAGI. That would be like claiming a tax break twice for the same expense.
You must also add back the following exclusions and deductions if you took any of them, but these are somewhat uncommon:
- The foreign earned income exclusion
- The foreign housing exclusion
- The foreign housing deduction
- The income exclusions for residents of American Samoa or Puerto Rico
Most taxpayers will find that their MAGIs are very close to—if not identical to—their AGIs. In the case of the student loan interest deduction, you might find that you only have to add back the deduction itself.
Divide your MAGI by $15,000 after you've calculated it. Convert the answer to a decimal with three decimal places. Use 1.000 for the calculation if it's more than 1.000. If it's less than 1.000, use it as is. Now multiply your student loan interest paid up to $2,500 by the decimal. The answer will be $2,500 or less.
You won't have to dig through all your student loan statements for the year, trying to track down how much interest you paid. Your lender should send you a Form 1098-E sometime after the first of the year. The amount of interest you paid is reported in Box 1 of the 2020 version of the form.
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