Student Loan Interest Deduction Limit
As tax season approaches, student loan borrowers should know whether they qualify for the interest deduction. This deduction can lower your income taxes if you meet several criteria.
A good portion of people’s paychecks go toward student loan payments. And that’s a big reason why most of us owe the IRS money at tax time. Fortunately, the IRS gives those with debt some relief through a deduction for interest. Here’s how it works and who is eligible. The student loan interest deduction is a way to reduce the amount of federal and private loans you owe each year. The IRS allows you to deduct up to $2,500 in qualifying student loan interest paid during the year. However, the maximum credit is based on your income and filing status.
The student loan interest deduction is a tax break for borrowers that reduces their taxable income. It is an above-the-line adjustment to your adjusted gross income (AGI) and is available regardless of whether you itemize your deductions or take the standard deduction. The deduction applies to the interest you pay on qualified student loans, including federal and private loans. However, you must have paid or incurred the interest within a reasonable period before or after taking out the loan, and it must be used to pay for qualified education expenses, which include tuition, fees, books, supplies, equipment, and room and board. The loan must also be in your name or the name of a spouse or other eligible dependent.
How to Qualify for Student Loan Interest Deduction?
To qualify, you must be legally obligated to pay back the loan, which must have been taken out for a qualified higher education expense. It must have been paid within a “reasonable period” after you took out the loan or stopped attending school. The amount is also limited if you have a high adjusted gross income or MAGI. MAGI must be below $140,000 for single filers or head of household filings and $70,000 for married couples who file jointly. The deduction begins to phase out when MAGI exceeds those amounts and is eliminated when it reaches $170,000.
If you are eligible to claim this deduction, the IRS will provide a worksheet with the information needed to file. The IRS requires that your loan servicer or lender send you a form called 1098-E by January 31. This form lists the amount of interest you paid during the year, and you can use this information to claim your deduction on your tax return. In addition, many loan servicers offer 1098-E forms through their online account portals.
