If you are deciding to itemize on your taxes, there are a few types of interest that you can include on your Schedule A. However, some interest incurred from students loans can be written off as a deduction, whether you are itemizing or not. A taxpayer is eligible to write off up to $2,500 of qualified student loan interest. Of course, there are some requirements you must meet.
First off, the loan received must have been entirely for education purposes. The proceeds of the loan must have been used to pay for higher education expenses at eligible educational institutions. Plus, the individual must be an eligible student.
An individual is an eligible student if they are a degree candidate that is currently taking a half-time course load. The student does not need to be the taxpayer. They can be the taxpayer, their spouse, or someone the taxpayer is claiming as a dependent in the year that the education was furnished.
There are also limitations with the expenses. Qualified expenses include tuition and fees that are related to the course. However, all required books, room and board, transportation, and necessary expenses are also included as qualified expenses. These are typically excluded from other education-type tax breaks but are included here.
The student loan interest can only be deducted by the individual that paid or is paying off the loan. However, the money cannot be borrowed from a related person, such as a spouse, parent, child, descendants, ancestors, or sibling, in order to pay off the loan. Individuals that are being claimed as a dependent by another taxpayer cannot claim the deduction in the current year. The same goes with individuals that are using the filing status ‘married filing separately’- they are ineligible for this deduction.
The reason that this deduction is limited to $2,500 is because it is based off of modified adjusted gross income. This AGI consists of income disregarding any student loan deduction. There are two equations – one for those filing under the status of ‘married filing jointly’ and one for those filing under anything else except ‘married filing separately’. These two equations will reduce what you are eligible to write off.
If your AGI is between $110,000 and $140,000 and you are filing ‘married filing jointly’, you must subtract your modified AGI by $110,000. Take this number and multiple it by the interest you have paid on your student loan. Then, divide this number by $30,000. This will show what you have to reduce the $2,500 by.
If your AGI is between $55,000 and $70,000 and you are filing anything except ‘married filing separately’ or ‘married filing jointly’, subtract your modified AGI by $55,000. Then, multiply this number by the interest you have paid on your student loan. Finally, divide this number by $15,000. This is what you have to reduce the $2,500 by.
Keep in mind that $2,500 is the maximum amount allowed for this deduction and in some cases, you will not be forced to reduce this amount.