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Several tax deductions were removed under the Tax Cuts and Jobs Act, but luckily for Americans with student loan debt, the student loan interest deduction was not one of them.
Millions of Americans are in student loan debt, and deducting student loan interest can help ease some of the burden of their repayments. With that in mind, here’s what Americans who make student loan payments need to know about this precious deduction in 2019.
Image source: Getty Images.
How Much Student Loan Interest Can You Deduct?
If you have qualifying student loan debt, you can deduct the interest you paid on the loan in the tax year. This is capped at $ 2,500 in total interest by return, not per person, every year. In other words, if you are single, you can deduct up to $ 2,500 in interest on student loans. However, if you are married and file a joint return, you and your spouse can only deduct a total of $ 2,500, even if both spouses have student debt.
If your student loans are officially called “student loans,” such as federal direct loans or a student loan through a private lender, you should receive a Form 1098-E, Statement of Student Loan Interest, which tells you how much you have paid. in interest throughout the year. If you’ve borrowed for qualifying education expenses in another way (we’ll talk about that later), you may need to review the statements to determine your interest expense.
Income Limits
Like many tax breaks, the student loan interest deduction is designed to provide tax relief for low to moderate income Americans. Thus, the possibility of benefiting from the deduction begins to disappear above a certain MAGI level (modified adjusted gross income).
For the 2018 tax year – the return you file in 2019 – these are the phase-out limits:
|
Income statement status |
The deduction starts to disappear with MAGI above … |
The deduction is completely eliminated with MAGI above … |
|---|---|---|
|
Single, head of family, qualified widower (s) |
$ 65,000 |
$ 80,000 |
|
Married spouse filing |
$ 135,000 |
$ 165,000 |
Data source: IRS. (Note: If you are filing as “married separately,†you cannot use the student loan interest deduction at all.)
For the 2019 tax year – the return you will file in 2020 – the income thresholds increase:
|
Income statement status |
The deduction starts to disappear with MAGI above … |
The deduction is completely eliminated with MAGI above … |
|---|---|---|
|
Single, head of family, qualified widower (s) |
$ 70,000 |
$ 85,000 |
|
Married spouse filing |
$ 140,000 |
$ 170,000 |
Data source: IRS.
Here is how it works. Let’s say you have at least $ 2,500 in student loan interest. If your MAGI (for most taxpayers, MAGI is the same as AGI, or Adjusted Gross Income) is at or below the lower threshold for your filing status, you can deduct the full $ 2,500. If your MAGI is above the upper threshold, you cannot deduce anything from it. And if your MAGI is between the two thresholds, you are entitled to a partial deduction.
What is a qualified student loan?
For a loan to be considered a “student loan†as defined by the IRS, it must have been obtained for the sole purpose of paying eligible education expenses for you, your spouse, or someone who was in your household. charge when you take out a loan.
In addition, the education costs paid with the loan must have been paid or incurred within a “reasonable time” before or after the loan was taken out. In a nutshell, this means that something like getting a personal loan and saying you used it to pay for tuition three years later is probably not “reasonable.” The IRS defines this as expenses related to a specific academic period and when the loan proceeds are disbursed between 90 days before the start of the academic period and 90 days after its end.
One of the main takeaways from this section is that the loan does not have to be an official “student loan†to qualify. For example, if you obtained a personal loan from a bank and used it for qualifying educational expenses, it may be considered a student loan for deduction purposes. The same can be said for interest on credit card debt if the card is used. uniquely for the purpose of paying study fees.
Eligible study expenses
The student for whom the loan has been taken out must have been enrolled at least half-time in a program leading to a diploma, certificate or other diploma. And the loan cannot come from someone related to you.
Finally, “eligible educational expenses†is a broad term and refers to tuition and fees, room and board (with certain limitations), books, supplies, equipment and other expenses. necessary associated with attending and completing courses.
What if you don’t detail?
Fortunately, the interest deduction on student loans is available to all eligible taxpayers, whether or not they choose to itemize the deductions. Technically, this is an “income adjustment,†which is also known as an above-the-line deduction.
The interest deduction on student loans can be very helpful. If you are in the 22% marginal tax bracket, a student loan interest deduction of $ 2,500 translates into a tax savings of $ 550. So make sure you document the interest on your student loan so that you can claim as much deduction as you are entitled to.
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