Student loan debt in America surpassed $1.5 trillion in 2018 and isn't slowing down anytime soon. And what keeps people in such dire straits with their education debt, besides the ever-increasing cost of going to college, is the interest.
That student loan interest can be important come tax season. Depending on a number of factors, you may be able to claim a student loan interest deduction of up to $2,500. That means the opportunity to lower your taxable income by thousands of dollars. That could be a big difference depending on the amount of taxable income you have the tax bracket you're in.
If you're lucky enough to qualify for the deduction, it's a simple process separate from any itemized deductions you may have.
Can Taxpayers Still Claim the Student Loan Interest Deduction?
Still, you may be wondering if the student loan interest tax deduction - one of the few minor forms of assistance those saddled with massive education debt can get - is even still something that exists. An early version of the 2017 Tax Cuts and Jobs Act (TCJA) included it as one of multiple tax deductions that would be eliminated.
However, the final bill that passed did include the student loan interest deduction. So those who are hoping to get that $2,500 in taxable income shaved off can rest easy. You absolutely can still claim the tax deduction - if you meet all necessary qualifications.
You claim this deduction as an adjustment to income, so even if you are taking the standard deduction on your tax return, you can claim the student loan interest deduction.
Student Loan Interest Tax Deduction Eligibility and Limits
The mere act of having student loans and the interest that comes with them doesn't, unfortunately, qualify you for the tax deduction by itself. You'll need to meet a number of qualifications involving a number of different factors, including how you file, the income you make and whether your loan is considered a "qualified student loan."
How Does Your Filing Status Impact the Student Loan Interest Deduction?
The only status that precludes you from claiming this tax deduction is if you are married and filing separately. If you are filing single, married filing jointly or head of household, you may have the opportunity to claim your student loan interest tax deduction.
However, even in these circumstances there are other instances that could prevent you from taking the tax deduction. For example, if you are married filing jointly, neither you nor your spouse can be named as a dependent if either of you want to claim your deduction. If you're a parent making payments on your child's student loans but the loans are in your child's name, you don't qualify for the deduction.
Something else people who are married filing jointly should know: that $2,500 cap on student loan interest deductions doesn't mean you can both each get $2,500 deducted from your taxable income. The one return the two of you file has a cap of $2,500.
What Makes Your Loan a Qualified Student Loan?
The loan from which you're trying to get an interest deduction has to meet certain qualifications for you to claim those deductions.
The loan you're paying, in addition to being under your name, has to have been either for you, your spouse or someone you were successfully able to claim as a dependent.
Your loan needs to have been used to pay qualified educational expenses. This includes tuition, textbooks and required coursework equipment.
In addition to being used specifically and exclusively for education for an eligible student in an academic period, the loan has to have been paid or incurred within what the IRS describes as a "reasonable period of time." The loan has to be disbursed within a period that goes from 90 days prior to the start of the academic period to 90 days after the conclusion of the academic period. At minimum, the student has to be half-time enrolled.
If the loan was granted by a relative or an employer, it likely doesn't qualify.
What Income Qualifies You?
The student loan interest deduction is intended to help those burdened with student loan debt and struggling to make ends meet. After all, getting $2,500 deducted from your taxable income is far more helpful for someone in a lower tax bracket than someone in the highest tax bracket.
Your Modified Adjusted Gross Income (MAGI) will determine if you qualify. Calculating MAGI requires adding certain things back into 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 of the amount of income you can make and still qualify for the student loan interest deduction, based on your filing status, for the 2019 tax year is:
- Single: $85,000
- Married filing jointly: $170,000
- Head of household: $85,000
This isn't the whole story of qualifying income, though. If you're under that limit but above a certain yearly income, your deduction slowly gets phased out and you will not be able to get the full $2,500 deduction, only a smaller percentage of it. For those filing single or as head of household, the phase-out begins when your income reaches $70,000. If you're married filing jointly, the phase-out starts at $140,000.
Let's say you do fall into that range. Here's how you calculate what you can deduct. Say you're filing as a single individual, you have a MAGI of $75,000 and paid $1,500 in student loan interest. You'll be multiplying that $1,500 by a fraction. The numerator of this fraction is your MAGI minus the beginning of the phase-out range (in this case, $75,000-$70,000). The denominator is the end of the phase-out range minus the beginning of the phase-out range (in this case, $85,000-$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 comes out to a student loan interest tax deduction of $500.
The math works similarly if you are filing jointly as a married couple. Let's say you're trying to deduct $2,500 in student loan interest while having $150,000 in MAGI. That's above the $140,000 when the phase-out starts, but not at the $170,000 that would phase it out entirely. Thus:
2,500 x (150,000-140,000)/(170,000-140,000)
This turns into 2,500 x 10,000/30,000, meaning you can deduct $833.33 in student loan interest.
How to Claim Your Student Loan Interest Deduction
Once you've figured out whether you're eligible to claim the deduction and calculated how much you can deduce, claiming the deduction is easy.
To claim it in your tax return, you'll need to include it as part of your Form 1040. The new 1040 form is designed to be much quicker and easier than in previous years. By itself, it includes only the most necessary and prudent information. If you need to add more information for the IRS, there are 3 different "Schedules" that give room for it, down from 6 in the previous year. In the event of adding your student interest loan deduction, there is a section in Schedule 1 to add it in line 20, as part of the adjustments to income.
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