If you took pleasure of receiving tax benefits as a college student, you may be sorrowful for not being able to benefit after graduation.
On the other hand, the advantage of getting an education doesn’t stop at graduation. The government offers a tax deduction for student loan interest which has the potential to save you a lot of money as you prepare to file taxes at the end of the year.
What is the Student Loan Interest Tax Deduction?
This tax deduction program allows graduates to deduct the interest they paid on their student loans from their tax burdens by subtracting $2500 from their taxable income every year. The deduction not only covers the loans they take out for themselves but the interest paid on loans their spouse or dependant take out as well.
Paying the interest on your student loans is one of the most rewarding things you can do because the government considers it as an “above the line” tax deduction that you can claim without itemizing.
You can find that information in the adjusted gross income part of the 1040 Form. Moreover, you also add this in addition to itemizing other deductions or the standard deduction if you don’t want to itemize. This deduction decreases your adjusted gross income.
Moreover, this has the potential to affect your qualification of a number of other deductions and tax credits.
Do I qualify for the Student Loan Interest Tax Deduction?
In order to be eligible to utilize this program, you must have the following requirements:
- You have to have paid interest on a student loan that meets the qualifications during the tax year you are filing for.
- A qualified loan is a type of loan that you got that’s only for expenses that are in relation to your education for you, your spouse, or a dependent that’s a school that has accreditation.
- You can’t allow anyone to claim you as a dependant when they file their taxes.
- You and your spouse can’t file separately.
- Your MAGI (Modified Adjusted Gross Income) can be less than 80,000 as an individual or $160000 if you’re married, filing jointly of course.
- We all know that the concept of MAGI seems difficult to understand. No worries, we will go over the details of this in a moment.
Moreover, the IRS offers a helpful tool (questionnaire) to determine whether or not you qualify for the Student Loan Interest Tax Deduction. The time it will take for you to complete the questionnaire is only 10 minutes.
According to the 207 tax year, a graduate can only claim up to $2500 in student loan interest. You’re income limits this deduction. Moreover, it’s a reduction for taxpayers with modified adjusted gross incomes that are in a specific phase-out range. You're MAGI can't be too high; if so, it's completely done away with.
What is Modified Adjusted Gross Income?
Your MAGI is an important factor of the equation because it determines if you qualify for a deduction phase-out. Moreover, it’s your adjusted gross income before you consider taking other deductions into account.
This also includes the student loan interest deductions you’ve been anticipating to qualify for. Even before calculating your MAGI, you can take this out initially.
Furthermore, you have to add back anything you deducted from tuition and fees on line 34 of the 1040 form as well as for your domestic production activities that appear on line 35.
Even though the following exclusions and deductions are rare, you have to add them back if you took advantage of any of them:
- Foreign earned income exclusion
- The foreign housing exclusion
- Foreign housing deduction
- The income exclusions for residents of American Samoa or Puerto Rico