Lesson 14: Student Loan Interest

As part of your journey through Adjustments to Income, understanding student loan interest is crucial. In this lesson, we'll explore how student loan interest can be deducted from your federal income tax, helping to reduce your overall taxable income.

What is Student Loan Interest?

Student loan interest is the interest paid on a loan taken out solely to pay for qualified higher education expenses. These expenses must be for you, your spouse, or your dependent.

Eligibility Criteria

To deduct student loan interest, the following criteria must be met:

  • The loan was taken out for you, your spouse, or your dependent.
  • You are legally obligated to pay the interest on the loan.
  • The loan is not from a related person or made under a qualified employer plan.
  • Your filing status is not married filing separately.
  • Your modified adjusted gross income (MAGI) is within the allowed limits.

How Much Can Be Deducted?

You can deduct up to $2,500 of student loan interest paid during the year. This amount is subject to income limitations based on your filing status and MAGI.

Income Phase-Out

Your ability to claim the student loan interest deduction is phased out if your MAGI is within a certain range.

graph TD A["MAGI Below Threshold"] -->|Full Deduction| B["Max Deduction: $2,500"] A["MAGI Within Phase-Out Range"] -->|Partial Deduction| C["Reduced Deduction"] A["MAGI Above Phase-Out Range"] -->|No Deduction| D["No Deduction"]

Calculating Your Deduction

The formula for the student loan interest deduction is as follows:

Deduction = Paid Interest \times \left(1 - \frac{MAGI - Lower Limit}{Upper Limit - Lower Limit}\right)

Reporting Your Deduction

To report your student loan interest deduction, fill out the appropriate sections on your Form 1040. Generally, the interest paid is reported using Form 1098-E, which is provided by your loan servicer.

Useful Resources

For more details on other adjustments to income, check out our lessons on IRA Contributions and Educator Expenses.

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