Deductibility of Student Loan Interest Explained

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You may come here because you need the information about deductibility of student loan interest. If you want to know about it, here I have the information about it according to some online resources.

About Student Loan Interest Deduction

What is student loan interest deduction? You may wonder what it is. Well, according to the Investopedia, it refers to a federal income tax deduction that permits borrowers to subtract up to $2,500 of the interest which is paid on qualified student loans from their taxable income. It is one of some tax breaks available to students and their parents to help pay for higher education. You have to meet certain eligibility criteria such as income level and filing status to be able to qualify for the deduction.

Deductibility of Student Loan Interest Explained

The Explanation About How the Student Loan Interest Deduction Work

Here is the explanation about how the student loan interest deduction works according to Investopedia.

A variety of tax deductions that permit people to reduce their taxable income for the year are outlined by the Internal Revenue Service (IRS). The student loan interest deduction is one of them. The student loan interest deduction permits for the deduction of up to $2,500 of the interest paid on a student loan during the tax year. So, people who are categorized into the 22% tax bracket and claim a $2,500 deduction are able to reduce their federal income tax for the year by $550.23.

For taxpayers, if they want to use the deduction, they need to meet certain qualifications. You can read the instances below.

  • The student loan must have been taken out for the taxpayer, dependent(s) or the taxpayer’ spouse. Parents who help legal borrowers with repayment are not able to claim the deduction.
  • The loan needs to be taken out during an academic period for which the student is enrolled at least half-time in a program leading to a certificate, degree or other recognized credential.
  • The loan needs to be used for qualified higher-education expenses such as fees, tuition, textbooks, equipment and supplies and it is not able to include room and board, student health fees, insurance and transportation.
  • The loan has to be used within a ‘reasonable period of time’ after it is taken out, and the proceeds need to be disbursed within 90 days before the academic period begins or 90 days after it ends.
  • The school where the student is registered needs to be an eligible institution, including all accredited public, non-profit, and privately owned for-profit post-secondary institutions that take part in the student aid programs which are managed by the U.S. Department of Education.

It is not like most other deductions, the student loan interest deduction is claimed as an adjustment to income on Form 1040. The meaning is that you do not need to fill out a Schedule A, which is used to itemize deductions to be able to claim it.

The Form of Student Loan Interest Deduction

As explained on the NerdWallet site, here is the explanation about the form of student loan interest deduction. Let’s say that you paid more than $600 in interest in 2021. If so, automatically you will receive form 1098-E where it is a student loan interest deduction form in the mail or by email.

If you find that you have paid less than that amount, it can happen because interest rates on federally held loans were frozen at 0% and payments were suspended for most of the year. However, it is important for you to note that you are still able to deduct whatever you did pay if you otherwise qualify.

Let’s say that a student loan interest deduction document is not received by you. If so, you are able to ask your student loan servicer or private lender to send it to you. A copy of the form and also details on how much interest you paid may be able to be found in your online account portal.

The Way to Calculate Your Deduction

As explained on the The Balance site, you are able to calculate your deduction by starting with your MAGI. It is your all-important adjusted gross income (AGI) before you take other tax deductions into account, including the student loan interest deduction you are hoping to qualify for.

You are not able to deduct this first before calculating your MAGI. Also, you need to add back the exclusions and deductions below if you took any of them. However, these are somewhat uncommon.

  • The foreign earned income exclusion
  • The foreign housing exclusion
  • The foreign housing deduction
  • For residents of American Samoa or Puerto Rico, the income exclusions are available

You have to divide your MAGI by $15,000 ($30,000 if married, filing jointly) after you have counted it. Then, the thing that you have to do is to convert the answer to a decimal with three decimal places. You have to use 1.000 for the calculation if it’s more than 1.000. Let’s say that it is less than 1.000. If so, you have to use it as is. And then, you have to multiply your student loan interest paid up to $2,500 by the decimal. The answer will be $2,500 or less as explained on the The Balance site.

You will not need to dig through all your student loan statements for the year, trying to track down the amount of interest you paid. You should be sent a Form 1098-E by your leder sometime after the first of the year. In Box 1 of the 2021 version of the form, the amount of interest you paid is reported.

You may wonder about the maximum student loan interest deduction. According to the The Balance site, the maximum amount that you are able to deduct for a year would be $2,500 even if you paid more interest to student loans.

You may also wonder whether parents can deduct student loan interest if they help make payments. According to the Balance site, parents are not able to claim a deduction on their taxes if they help their child pay off their student loan. The student is the borrower and their information is on the loan paperwork, so that it makes them the debt owner.

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