Student loan debt in the United States topped $ 1.5 trillion in 2018 and won’t be slowing anytime soon. And what keeps people in dire straits with their student debt, besides the ever increasing cost of a college education, is interest.
This student loan interest can be significant during tax season. Depending on a number of factors, you may be eligible for an interest deduction on student loans of up to $ 2,500. This means the possibility of reducing your taxable income by thousands of dollars. It could be a big difference depending on how much taxable income you have and what tax bracket you are in.
If you are fortunate enough to qualify for the deduction, this is a straightforward process separate from any itemized deductions you may have.
Can taxpayers still claim the interest deduction on student loans?
Still, you might be wondering if the tax deduction for interest on student loans – one of the few forms of minor help available to those struggling with massive student debt – is still something that exist. An early version of the Tax Cuts and Jobs Act (TCJA) of 2017 included it among the multiple tax deductions that would be eliminated.
However, the final bill that was passed included the deduction of interest on student loans. So those who hope to reduce their taxable income by $ 2,500 can rest easy. You can still claim the tax deduction – if you meet all the requirements.
You claim this deduction as an income adjustment, so even if you take the standard deduction on your tax return, you can claim the interest deduction on student loans.
Eligibility and Limits for the Interest Tax Deduction on Student Loans
Just having student loans and the interest that goes with them unfortunately does not by itself qualify for the tax deduction. You will need to meet a number of qualifications involving a number of different factors, including how you file your return, how much income you earn, and whether your loan qualifies as a “qualifying student loan.”
How does your filing status affect the deduction of interest on student loans?
The only status that prevents you from claiming this tax deduction is if you are married and filing separately. If you are filing a declaration as a single, married or head of household, you may have the option of claiming the interest tax deduction on your student loan.
However, even under these circumstances, there are other cases that might prevent you from benefiting from the tax deduction. For example, if you are married and are filing jointly, neither you nor your spouse can be named as a dependent if either of you wishes to claim your deduction. If you are a parent and make payments on your child’s student loans, but the loans are in your child’s name, you are not eligible for the deduction.
Another thing married people filing jointly should know: This $ 2,500 cap on student loan interest deductions doesn’t mean you both can get $ 2,500 each deducted from your taxable income. . The return you both file has a limit of $ 2,500.
What Makes Your Loan a Qualifying Student Loan?
The loan for which you are trying to get an interest deduction must meet certain conditions in order for you to claim these deductions.
The loan you are paying, in addition to being in your name, must have been either for you, your spouse, or someone you have been able to successfully claim as a dependent.
Your loan must have been used to pay for eligible educational expenses. This includes tuition, textbooks and required course materials.
In addition to being used specifically and exclusively for the education of an eligible student during an academic period, the loan must have been paid or contracted within what the IRS describes as a “reasonable period of time.” The loan must be disbursed within a period ranging from 90 days before the start of the academic period to 90 days after the end of the academic period. At a minimum, the student must be enrolled part-time.
If the loan was granted by a relative or an employer, it is probably not eligible.
What income qualifies you?
The interest deduction on student loans is intended to help people in debt and struggling to make ends meet. After all, getting $ 2,500 deducted from your taxable income is much more useful for someone in a lower tax bracket than it is for someone in the higher tax bracket.
Your Modified Adjusted Gross Income (MAGI) will determine if you qualify. Calculating MAGI requires adding certain things to your Adjusted Gross Income (AGI), such as foreign earned income exclusions. These may not impact you at all, and you may end up with a MAGI exactly the same as your AGI.
The limit on the amount of income you can earn while still being eligible for the student loan interest deduction, based on your reporting status, for the 2019 tax year is:
- Single: $ 85,000
- Joint deposit: $ 170,000
- Head of family: $ 85,000
This is not the whole story of qualifying income, however. If you are below this limit but above a certain annual income, your deduction is phased out and you will not be able to get the full amount of the $ 2,500 deduction, but only a smaller percentage of it. . For individuals or as the head of a household, the phase-out begins when your income reaches $ 70,000. If you are married and are filing jointly, the phase-out starts at $ 140,000.
Let’s say you fall within that range. Here’s how to calculate what you can deduct. Suppose you are applying as a single person, have a MAGI of $ 75,000, and have paid $ 1,500 in student loan interest. You will multiply that $ 1,500 by a fraction. The numerator of this fraction is your MAGI minus the start of the phase-out range (in this case, $ 75,000 to $ 70,000). The denominator is the end of the soft delete range minus the start of the soft delete range (in this case, $ 85,000 to $ 70,000).
So your equation to figure out your deduction would be:
1,500 x (75,000-70,000) / (85,000-70,000)
This can be simplified to 1,500 x 5,000 / 15,000, which equates to a tax deduction of interest on student loans of $ 500.
The calculation works the same if you are filing jointly as a married couple. Let’s say you’re trying to deduct $ 2,500 in interest on a student loan while still having $ 150,000 in MAGI. It is above the $ 140,000 at the start of the phase-out, but not the $ 170,000 that would eliminate it completely. Thereby:
2,500 x (150,000-140,000) / (170,000-140,000)
This turns into 2,500 x 10,000 / 30,000, which means you can deduct $ 833.33 in student loan interest.
How to claim the interest deduction on your student loan
Once you’ve determined if you’re eligible for the deduction and calculated how much you can deduct, it’s easy to claim the deduction.
To claim it on your income tax return, you will need to include it on your Form 1040. The new Form 1040 is designed to be much faster and easier than in previous years. By itself, it contains only the most necessary and prudent information. If you need to add more information to the IRS, there are 3 different “schedules” that allow you to do this, up from 6 the previous year. In the case of adding your deduction for education interest, there is a section in Annex 1 add it to line 20, as part of the income adjustments.