Tax Policy

Think You Can Deduct Student Loan Interest? Not So Fast.

The more money you make the less amount of student loan interest you can deduct.

One of the many benefits offered to reduce the burden of higher education is the student loan interest deduction. This deduction allows taxpayers to deduct up to $2,500 of student loan interest from their income. However, once you start making more money, the amount of student loan interest you can deduct will be capped.

This article will discuss the income limitations and whether or not you can claim the student loan interest deduction.

Phaseout Starts Lower Than You May Think

The purpose of obtaining a college degree is to give a boost to your salary. Depending on your degree of choice, you’d hope to make six figures one day, or more! But the more successful you are, the less likely you’ll be able to deduct student loan interest.

How successful? Well, if you are filing single and make over $65,000 ($130,000 married filling joint) then you can start seeing a reduction in the amount of student loan interest you will be able to deduct. If you earn over $80,000 ($160,000 married filling joint) a year, then forget it – you won’t be able to deduct any of your student loan interest.

Calculating the Deduction

The amount of the deduction is determined by the Modified Adjusted Gross Income (MAGI). On form 1040 the MAGI is your Adjusted Gross Income (AGI) on line 38 without factoring in the tuition and fees deduction (line 34), or the domestic production activities deduction (line 35), and then modified by adding back any:

  1. Foreign earned income exclusion
  2. Foreign housing exclusion
  3. Foreign housing deduction
  4. Exclusion of income by bona fide residents of American Samoa, and
  5. Exclusion of income by bona fide residents of Puerto Rico

Once you calculate your MAGI, you will then need to calculate the phaseout. If you are single and make less than $65,000, you can deduct the lesser of

  1. $2,500, or
  2. The actual amount of student interest paid

Example: If your MAGI is less than $65,000 and you paid $800 in student interest for the year, you may deduct $800. If your MAGI is less than $65,000 and you pay $3,000 in student loan interest, you may deduct $2,500.

If your MAGI exceeds $80,000 ($160,000 married filling joint), then you won’t be able to deduct any student loan interest. If your MAGI falls between $65,000 to $80,000 ($130,000 to $160,000 married filling joint), you will be able to deduct a portion of your student loan interest.

Factoring in the Phaseout

The first step to calculate your deduction when the phaseout applies is to calculate your allowable student loan interest. You may deduct the smaller of

  1. $2,500, or
  2. The actual amount of student interest paid

To calculate the disallowed portion of your student loan interest, you’ll need to use this formula:

(Allowable student loan interest deduction * (MAGI – Beginning Phaseout)) / Phaseout Range.

This might seem complicated, so let’s look at an example:

Example: Allowable student loan interest is $800 and your MAGI is $70,000. ($800 * ($70,000 – $65,000)) / $15,000 = $267. This means you will have to reduce your student loan interest deduction by $267 – making it $533.

Conclusion

Calculating the deductible portion of your student loan interest can be complicated. Luckily, tax software makes calculating your deduction easy. The main takeaway  is that not all of your student loan interest is deductible, and the more you make, the less likely you’ll be able to claim this deduction.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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