It’s tax time! The student loan interest deduction is a topic of conversation around this time of year. What’s new for filing your 2019 tax return? Tax topics can be pretty dry, so let’s skip to the skinny:
- Modified adjusted gross income (MAGI) limits: The amount of your student loan interest deduction is gradually reduced (phased out) if your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if you file a joint return). You can’t claim the deduction if your MAGI is $85,000 or more ($170,000 or more if you file a joint return).
- No double benefit allowed: The IRS is cracking down on “double-dipping.” You can’t deduct as interest any amount that is an allowable deduction under any other provision of the tax law. You also can’t deduct as interest on a student loan any amount paid from a distribution of earnings made from a qualified tuition program after 2018 as the earnings are treated as tax free because they were used to pay student loan interest.
What’s the same about the student loan interest deduction this year?
- The maximum deduction: $2,500
- This is an above-the-line deduction, so there is no need to itemize to reap the benefit.
- If you file taxes married separately, you can’t take this deduction at all.
- If you file taxes married jointly and both spouses have student loan debt, you can only deduct up to $2,500. In other words, the deduction doesn’t double.
You can claim the student loan interest deduction if all of the following apply:
- You paid interest on a qualified student loan*.
- You’re legally obligated to pay interest on a qualified student loan.
- You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s return.
*According to the IRS, a qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:
- For you, your spouse or a person who was your dependent when you took out the loan;
- For education provided during an academic period for an eligible student; and
- Paid or incurred within a reasonable period of time before or after you took out the loan.
Publication 970, Tax Benefits for Education for use in preparing 2019 tax returns, is extremely helpful to read through all the technicalities for more information. Another cool tool is this Interactive Tax Assistant questionnaire, which helps you determine if you can deduct the interest you paid on a student or educational loan for the 2017, 2018 or 2019 tax year(s).
More tips on what to know about the student loan deduction:
- Your loan servicer should send you a Form 1098-E, Student Loan Interest Statement, if they received interest payments of $600 or more on one or more qualified student loans. This document will tell you how much you can deduct.
- This deduction is reported on Schedule 1 of the borrower’s tax return.
Common misconceptions about the student loan interest deduction:
- The deduction’s cost savings to you may not be as significant as you think. Don’t be upset if you now make too much money to be able to deduct student loan interest — and definitely don’t keep student loans around for this purpose.
- A tax deduction is not the same thing as a credit. A deduction reduces your taxable income, whereas a credit reduces your actual tax bill dollar-for-dollar.
- If you have a $0 required payment on your income-driven repayment plan, you cannot claim the student loan interest deduction because you did not actually pay any interest.
Consider working with a professional on your taxes if you’re unsure how to take full advantage of all the deductions and credits that you can. We are the go-to for figuring out your student loan and tax integrated strategy, but for actually filing your taxes, we suggest tax affiliate [email protected]. Reach out and mention us to get the special Student Loan Planner® discount.
Do you feel confident in your overall student loan plan? If not, schedule your custom student loan plan consultation with us.