What comes to mind when you think of a college or a university? Well, there are students, classes, professors, and of course, loans. As anyone with student debt can attest to, it has to be paid back with interest. This is a reality that hits many college graduates hard when they step into the real world and start to work. The amount of interest alone astonishes them in a way that no one could have prepared them for. However, there’s a silver lining to this otherwise very grey cloud – up to $2,500 of interest paid on student loans in a given tax year is very likely deductible against gross income on your federal tax return.

As with all federal deductions on your return, there are requirements that must be met if you are interested in deducting student loan interest. First, the interest that you paid in a given tax year must come from a qualified student loan. The term qualified student loan means that the loan must be for you, your spouse, or a dependent; used for qualified educational expenses; and for education that was provided to an eligible student. Breaking this down even further, qualified educational expenses are tuition and fees; room and board; books, supplies, and equipment; and other necessary expenses (for example, transportation). Additionally, a person attending college is an eligible student if he or she was enrolled at least half-time in a program leading to a degree, certificate, or similar credential. It’s worth noting here that the following student loans are not considered qualified and therefore don’t allow for their interest payments to be deducted: a student loan from your relative and an employer-granted student loan.

Furthermore, the student loan interest deduction phases out between $70,000 and $85,000 for single filers and between $140,000 and $170,000 for joint filers, meaning that taxpayers whose modified adjusted gross income is greater than $85,000 if single, or $170,000 if married filing jointly are ineligible to take the student loan interest deduction.

Next, a few quick requirements that are worth understanding, the first of which is that you must be required to pay interest on the loan. If the student loan doesn’t require that the interest on the loan is paid back, its interest is not deductible. However, this is almost never a problem because almost all student debt has obligatory interest payments. Moreover, you can’t take the student loan interest deduction if you’re filing status is married filing separately and/or you are claimed as a dependent on another’s tax return. Finally student loan interest must have, in fact, been paid during the tax year for which you are attempting to deduct it, which makes intuitive sense.

Note that parents can claim a student loan interest deduction for their children that they claim as dependents if those parents are legally obligated to pay the loan back. Also, as was previously mentioned, the maximum amount of student loan interest deductible is the lesser of the amount of interest paid or $2,500. Furthermore, you can take the student loan interest deduction while also getting one of the tuition credits – the American opportunity credit or the lifetime learning credit. So if you have a kid in college and a kid that graduated, and you’re respectively paying for one kid’s tuition and the other’s student loans, you can potentially get a tax benefit for both on the same tax return.

Taxpayers figure the student loan interest deduction using the Student Loan Interest Deduction Worksheet found on page 90 in the instructions to Form 1040. Once you’ve figured the amount of the deduction, claim the deduction using Schedule 1, line 20.   

If interested, you can find more information about the tax benefits of education in IRS Publication 970.

If you’re having any issues with the student loan interest deduction, or any deduction, or anything to do with your taxes in general, there are no stupid questions here at Dino Tax Co; call us today at (713) 397-4678 or email davie@dinotaxco.com. The initial phone consultation is always free. Also, consider liking us on Facebook: https://www.facebook.com/dinotaxco.