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How to calculate and claim your student loan interest deduction
A step-by-step guide to saving on your taxes in 2019.
For all the bad that comes with student loans, there’s one silver lining: They may help you save on your taxes. Thanks to the student loan interest deduction, you may have a few extra dollars in your pocket come tax season if your income is under a certain amount and your student loans qualify.
What is the student loan interest deduction?
The student loan interest deduction reduces your taxable income based on how much interest you paid on top of your student loan principal payments.
As an example: If you make $50,000 a year, all of it is subject to taxes. But a $2,000 deduction can bring your taxable income down to $48,000. That’s the idea behind the student loan interest deduction — to bring down your taxable income.
How student loan interest works
When you need money for college, you might take out a student loan. Lenders won’t give you the money for free — they expect to be paid interest.
You’ll pay this interest as you repay your student loan. In fact, when you make a payment toward your loan, it goes toward the interest first, before any of it reduces your principal — or the original amount you borrowed. Over the course of a year, that interest adds up.
How the tax deduction works
Now comes the student loan interest deduction. To calculate your interest deduction, you take the total amount you paid in student loan interest for the tax year — from January 1 to December 31, for most people — and deduct it from your taxable income. The deduction is capped at $2,500, and it may be reduced the higher your income is. Federal and private loans both qualify for deduction.
Though it’s a drag you can’t deduct all of your student loan interest, the deduction can be a big help. Ultimately, it lets you pay less in taxes or receive a larger tax refund.
How much could I save?
With a $2,500 deduction cap in 2018, it’s possible to save up to $625 you owe on your taxes — or get an additional $625 on your refund. However, the amount you’ll actually save on your taxes depends on your income and whether you can claim the full $2,500 student loan interest deduction.
Do I qualify for a student loan tax deduction?
You’re good to go on the deduction if you meet the following requirements:
1. Your income is under a specific amount, depending on status and income.
Your modified adjusted gross income (MAGI) must be less than $80,000 — or $165,000 if you’re married and filing jointly. If you make between $65,000 and $80,000, your deduction might be less based on the IRS’s phaseout rules. We’ll cover these in the next section.
What is your MAGI?
Your MAGI is like your adjusted gross income (AGI). But it’s modified by adding back in special deductions you might’ve taken, like student loan interest, qualified tuition expenses and tuition fees. MAGI is a way of calculating your income to determine whether you’re eligible for such tax benefits as IRA deductions and income tax credits. Of course, it’s also used to determine whether you qualify for the student loan tax deduction.
2. You fall under an accepted filing status.
You don’t qualify if:
- Someone claims you as a dependent on their tax return.
- You’re married and filing your taxes separately.
3. Your student loan qualifies.
You have a qualified student loan if:
- You took out the loan solely for higher education expenses.
- You took out the loan for yourself, your spouse or your dependent.
- The loan is not from someone related to you or from a qualified employer plan.
4. The student qualifies.
If you took out a parent loan for someone in school, the student must have:
- Incurred the higher education expenses around the time you took out the loan.
- Enrolled in a higher education program at least half time.
5. Your interest payments qualify.
You must have paid interest on your student loan during the tax year you’re filing for. If you personally didn’t pay interest, you don’t qualify for the deduction.
Furthermore, you must be the one who’s legally obligated to pay interest on the loan — meaning the loan must be in your name.
What is Form 1098-E?
Form 1098-E is a tax form that tells you how much you paid in interest on your student loans over the past year. It’s sometimes called the Student Loan Interest Statement.
You’ll need to file Form 1098-E to deduct student loan interest payments from your taxes. You can typically claim interest on payments for student loans you’ve used toward qualified education expenses. These expenses include tuition, room and board, supplies, textbooks and other expenses that come with studying for a degree.
Exceptions might include loans you used to pay for postgraduate expenses, like a bar study course or relocating for a medical residency, if your school doesn’t consider them part of the cost of attendance. If you’re paying off these types of student loans, talk to a tax specialist to find out if they’re eligible.
How to calculate my student loan interest tax deduction
If you’re using an online filing service or tax return software, most calculate your student loan interest tax deduction for you. You’ll just need to have the numbers handy from the tax forms you received, such as your W-2 and 1098-E. If you’re interested in calculating it manually, follow these steps:
1. Find your modified adjusted gross income.
It takes a few steps to find your MAGI:
- Go through IRS Form 1040 and complete the line items in the Income section.
- Take your result from the Income section to complete the Adjusted Gross Income (AGI) portion.
- Finally, use your AGI to calculate your modified adjusted gross income.
There’s no section for MAGI on your tax return, but you can calculate it yourself. To calculate your MAGI, you’ll need to add back into your AGI any number of untaxable deductions you might have qualified for using IRS Form 1040 Schedule 1. These deductions include student loan interest, qualified tuition expenses and tuition fees, along with rarer deductions like rental losses and adoption expenses.
Why does the IRS use MAGI to determine my eligibility — rather than my AGI?
Your AGI doesn’t necessarily represent what you really earned in a year. That’s because it reflects any of the adjustments the IRS allows you to deduct from your income — and, therefore, not pay taxes on.
For a more accurate idea of your annual income, the IRS prefers to assess your modified AGI — your AGI with all your qualified deductions added back in.
2. Find your filing status.
Choose one of the following as your filing status:
- Single
- Qualifying Widow(er)
- Head of Household
- Married Filing Jointly
If you need help figuring it out, visit the IRS’s page on determining your status.
3. Know how much student loan interest you can deduct.
Look at Form 1098-E that you received from your loan servicer to see how much student loan interest you paid in the year. You can also log on to your loan servicer’s website and view your account summary. The maximum you can deduct is $2,500.
4. Apply the phaseout formula if you make $65,000 or more — $135,000 or more if you’re married and filing jointly.
You likely qualify for the student loan interest deduction if you make $65,000 to $80,000 — or $135,000 to $165,000 if you’re married and filing jointly — but your deduction will be reduced according to a phaseout formula.
Here’s how to calculate your deduction under the phaseout formula:
- Take your MAGI and subtract $65,000 — or $135,000 if you’re married and filing jointly.
- Divide that figure by $15,000 — or $30,000 if you’re married and filing jointly.
- Multiply that resulting figure by your original student loan interest deduction.
- Subtract the resulting figure from your original student loan interest deduction.
IRS resources for student loan interest deduction
- Publication 970 — see page 31 for instructions
- IRS Form 1040
- IRS Form 1040 Schedule 1
How to deduct student loan interest on my taxes
After you’ve received Form 1098-E from your servicer, you’re ready to get started on your taxes — or at least the part involving student loans.
Step 1. Review your Form 1098-E.
Form 1098-E is a relatively short document. Make sure yours includes Copy B for borrowers and that your address and personal details are correct.
Under the box stating your year, pay attention to two boxes specifically:
- Box 1. This box tells you how much interest you paid on your student loans over the past year.
- Box 2. This box applies only to borrowers who carry student loans from before 2004. If this box is checked, it tells the IRS that the number in Box 1 doesn’t include origination fees or capitalized interest on any loans made before September 1, 2004.
Step 2. Make sure you’re qualified for a deduction.
Just because you made student loan interest repayments doesn’t necessarily mean you’re qualified for a deduction. For one, you’re ineligible for a deduction if somebody else can claim you as a dependent on their tax return.
To qualify, you also need to:
- File a joint tax return if you’re married.
- Earn less than $80,000 a year if you’re filing as single.
- Live in a household that earns less than $165,000 a year if you’re married.
If you don’t meet these criteria, you won’t be able to get a deduction for your student loan interest payments.
Step 3. Calculate your deduction.
You can skip this step if you’re using tax preparation software like TurboTax or have a CPA — they’ll crunch the numbers for you. Or follow our steps listed above to calculate your deduction.
If you’re filing on your own, you’ll need to run calculations before you can enter your student loan deduction on your tax form.
Step 4. Enter your deduction.
Enter your student loan interest deduction on line 33 of IRS Form 1040 Schedule 1 .
Does refinancing affect my student loan interest deduction?
It depends. You can most likely deduct student loan interest from your taxes after refinancing your student loans to get a better interest rate or more flexible loan term. However, you may not be able to deduct your student loan interest if you refinance for more than the original amount of your loan.
Interested in refinancing? Compare your options
Updated December 15th, 2019
What other tax breaks can I get for my student loans?
There are a few more ways student loans can help you you can save on your taxes:
American opportunity tax credit
The American opportunity tax credit (AOTC) allows you or your parents to deduct up to $2,500 each year for the first four years of your higher education. To earn the tax credit, the student must attend a degree-granting at least half-time and must either be you, your spouse or a dependent listed on your taxes. You also must have a MAGI of $90,000 or less to qualify — $180,000 for joint filers.
Lifetime learning credit
The lifetime learning credit (LLC) allows you to deduct up to $2,000 a year while you’re enrolled in a higher education program — including undergraduate, graduate and even professional development courses. There’s no limit to how often you can use this, though your MAGI must not be more than $67,000 or more — $134,000 for joint filers.
No taxes on some types of forgiveness
Before the 2018 tax reform, federal student loan borrowers who qualified for forgiveness or discharge had to pay income taxes on the amount the government canceled. That’s still the case in most situations. But now you don’t have to pay income tax if you qualify for death or permanent disability discharge.
3 ways student loans can affect your taxes
Bottom line
Saving a few hundred dollars on your taxes or getting a bigger refund can make a difference in your personal finances. Be sure to check with a tax professional if you have any questions about the student loan interest deduction or any other concerns when filing.
To learn more about how student debt works — and how to deal with paying it back — read our comprehensive guide to student loans.
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