According to the New York Federal Reserve, student loan debt in the U.S. is over $1.46 trillion. And while you can’t deduct a student loan on your federal tax return, the interest from student loan payments is tax-deductible.
The student loan interest deduction allows you to deduct up to $2,500 on your federal income tax return for the loan interest you paid during the year. The exact amount you can deduct depends on how much interest you paid and your income. You no longer qualify for the deduction once your income crosses a certain threshold.
This is an above-the-line tax deduction, which means it decreases your taxable income. You do not need to itemize to get the deduction. You can claim the standard deduction and the student loan interest deduction.
Who qualifies for the student loan interest deduction?
In order to qualify for the student loan interest deduction, there are a few criteria you need to meet.
For starters, the loan you’re paying must have been for you, your spouse or a dependent. You cannot claim the deduction if someone else can claim you (or your spouse) as their dependent, even if you’re the one who made the loan payments.
You can claim the deduction if your filing status is single, head of household, married filing jointly, or qualifying widow(er). You cannot claim the deduction if you are married but filing separately.
How much of the deduction you can claim, if you can claim anything, also depends on your income.
Who you can claim as a dependent
Individuals who you can claim as dependents for the student loan interest deduction are the same as who you can claim as dependents for the rest of your tax return. That can include children, parents, and other relatives.
Notably, you cannot claim someone as a dependent if they filed a joint return or if they had gross income of $4,150 or more in the tax year.
Income limits for claiming the deduction
The IRS uses your modified adjusted gross income (MAGI) to determine whether or not you qualify to take the student loan interest deduction.
MAGI is your gross income for the year minus certain deductions. Common deductions include charitable donations and health savings account (HSA) contributions.
For your 2019 taxes, which you will file in 2020, the student loan interest deduction is worth up to $2,500 for a single filer, head of household, or qualifying widow(er) with MAGI of less than $70,000.
For single filers, once your MAGI hits $70,000, the deduction begins to phase out, meaning the maximum amount you can deduct is less than the full $2,500. Once your MAGI reaches $85,000, you can no longer claim the deduction.
Joint filers can deduct up to the maximum if their MAGI is less than $140,000. Then the deduction phases out and is eliminated completely once your income reaches $170,000.
The IRS typically increases these phase-out ranges each year to account for inflation. (For example, the 2018 student loan interest deduction phase-out was $65,000 to $80,000 for individuals.) However, for tax year 2020, the taxes which you’ll file in 2021, the MAGI phase-out ranges will remain the same.
Keep in mind that the deduction applies per return. That means the maximum deduction if you’re married and filing jointly is $2,500, even if both spouses could have individually qualified for a $2,500 deduction.
Read more about how to prepare for your 2020 taxes.
What is a qualified student loan?
First of all, your loan cannot be from one of your relatives or through an employer-provided educational assistance program.
Any public or private student loans can qualify as long as they go entirely toward qualified education expenses. A qualified expense is money you spend on the things that are required in order for you to enroll or attend an institution.
The following are qualified expenses:
Tuition and fees
Room and board
Books and other class supplies
Other necessary expenses, like transportation
The institutions that qualify include most colleges, universities, and vocational schools. It doesn’t matter if the institution is public, nonprofit, or private.
You just need to have been enrolled at least half time in a program that leads to a degree, certificate, or similar credential.
What qualifies as interest?
Beyond the simple interest you pay on your loans, there are a few things that can qualify for the deduction.
Loan origination fee
This is usually a one-time fee that lenders charge for creating and processing a new loan. Starting Sept. 1, 2004, this fee is already included on your 1098-E (more on that form later). For loans before that date, you will need to calculate the interest on origination fees yourself.
This is interest that accrues and then gets added to your loan principal if you don’t pay it. As an example, unsubsidized federal loans accrue interest while you’re in school and during the loan’s grace period. It’s common for that interest to be capitalized (added to your principal) at the end of your grace period, unless you pay it first.
Credit card interest
Interest on a revolving line of credit, including credit card debt, qualifies if you use that line of credit only to pay qualified education expenses.
Interest on refinanced and consolidated loans
If you take out a loan solely to refinance or consolidate your student loans, you can also include the interest payments on that new loan. (Read more about debt consolidation.)
How to claim the student loan interest deduction
When you file your federal income tax return, you can claim the student loan interest deduction without itemizing. You just need to attach Schedule 1 to your tax return. Some tax-filing services allow you to attach Schedule 1 and still file for free.
If you’re filing back taxes or amending a return for a previous tax year, know that Schedule 1 was created as part of tax code changes in 2017 (that also resulted in new tax brackets). Before 2018, you claimed the student loan interest deduction directly on Form 1040.
The important tax form you need to help you claim the deduction is the 1098-E, Student Loan Interest Statement.
The 1098-E comes from your loan provider. It states in Box 1 how much loan interest you paid during the year. If you have loans from multiple lenders, you will receive a 1098-E from each of them. If you don’t receive a physical 1098-E in the mail, you can also log in to your lender’s or loan servicer’s website to download a digital copy.
If you are filling out your return by hand, you can calculate the amount of your deduction by using the worksheet in the Form 1040 instructions. Then you will enter your deduction on Line 33 of your Schedule 1 and attach the form when you send in your tax return.
Read more about how to fill out Form 1040.
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