After a three-year pandemic pause, federal student loan payments resumed for more than 28 million borrowers in October 2023, derailing budgets and increasing monthly expenses for many. But there is a silver lining: the tax deduction.
If you’ve paid interest on your student loans, you may be able to reduce your federal taxable income by up to $2,500 thanks to the student loan interest deduction, or SLID. Not everyone can take this deduction, as it’s limited by your household adjusted income. Learn the rules to find out whether these tax savings apply to you.
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When Can You Deduct Student Loan Interest?
If you took out a student loan for yourself, your spouse or your child, you paid some interest on that loan and your modified adjusted gross income is below certain limits, you can deduct the interest on your federal tax return. The interest you’ve paid for any student loan, public or private, is tax-deductible as long as the loan qualifies — it doesn’t only have to be federal student aid.
Keep in mind that the loan payments themselves aren’t deductible, just the interest you paid.
Many federal student loans were eligible for 0% interest for much of 2023. Before you take a student loan interest deduction, check whether you paid interest and if so, the amount you paid. You can find this on your servicer’s website.
Eligibility for Student Loan Interest Deduction
To be eligible for the maximum student loan interest deduction of $2,500 for tax year 2023, your modified adjusted gross income must be under $75,000 ($155,000 if filing jointly with your spouse). If your MAGI is between $75,000 and $90,000 ($155,000 and $185,000 if filing jointly), you’re eligible for a portion of the credit. The deduction phases out altogether if you earn above $90,000 ($185,000 for joint returns).
In 2024, the limits are $80,000 ($165,000 for joint returns). If your MAGI is above that but below $95,000 or more ($195,000 or more for joint returns) you’ll receive a partial deduction, with the deduction phasing out completely above those limits.
Jack Wang, college financial aid advisor at Innovative Advisory Group, points out that the person taking the deduction may not be the person making the payments.
“For example, if a student took out loans and is working after graduation, the parents could gift the payments to the graduate by making the loan payments, but the graduate could still take the deduction on their own tax return,” Wang says. “The parents wouldn’t benefit from the tax break, but the graduate would.”
Keep in mind, though, that the deduction is for the person who incurred the debt and is responsible for paying it. Ron Ramer, a certified public accountant with 19 years of experience, cautions students and parents to record the deduction carefully.
“If a student is being claimed as a dependent on another return, then they are not eligible to claim the deduction,” he says. “Likewise, if the debt is in the student’s name and the student is being claimed as a dependent, then the parents are not eligible to claim the deduction.”
But if the student incurred the debt, they’re not a dependent and they meet other qualifications, then they’d be eligible for the deduction — and it’s probably in their best interest to claim it.
Exceptions to the Eligibility Rule
Even if your income meets the IRS requirements, it’s not a guarantee you’ll be able to claim the deduction. You can’t take the deduction if:
— Your employer paid for work-related education.
— Your MAGI is more than the limit.
— You are married filing separately.
— The loan is not a qualified loan.
— You received the loan from a family member.
— The student attended less than half time.
— The student did not attend a qualified institution.
If you’re unsure if you meet the criteria, the IRS offers an interactive tax tool that can help you determine whether you can deduct your student loan interest.
How to Determine Your Deduction Amount
To determine your deduction amount, you’ll need to know how much interest you paid. You should receive a Form 1098-E from your servicer with this information.
You’ll also need to compute your MAGI. This is your adjusted gross income, or AGI, which is noted on line 11 of the 1040 or 1040-SR federal return form, with foreign income and housing exclusions added back in. Your MAGI determines how much, if any, of the deduction you can take.
If your MAGI is below the limit, you can deduct the full amount of student loan interest paid, up to $2,500. If your MAGI qualifies you for a reduced deduction, you’ll figure it like so:
— Reduced deduction = interest deduction x (MAGI – $75,000) / $15,000, subtracted from interest deduction.
For example, if you’re filing single, paid $1,000 in interest and your MAGI is $80,000, you’d be able to deduct $667 instead of $1,000:
— $1,000 x ($80,000 – $75,000) / $15,000 = $333.
— $1,000 – $333 = $667 reduced deduction.
Should you worry if you plan to take the standard deduction instead of itemizing?
“Nope,” says Eric Arbore, a Pittsburgh-based CPA and senior tax accountant. “It is a separate deduction that is not affected by deduction type,” he says, so you can claim it no matter what other deductions you are (or aren’t) itemizing.
Documents Needed for Claiming Student Loan Interest Deduction
There are a few documents you’ll need before you can claim the student loan interest deduction on your federal taxes:
— Form 1040 or 1040-SR. This is your federal tax return form.
— Form 1098-E. This shows the interest paid. You should receive this from the lender or institution that received your interest payments.
— Student loan interest deduction worksheet. Use this to calculate the deduction. You can find it in Schedule 1 of Form 1040.
Step-by-Step Guide to Claiming Student Loan Payments on Taxes
Once you’ve gathered your documents, follow these steps to claim the deduction:
— Determine whether you, the student, the loan and the institution meet the IRS requirements for the deduction.
— Calculate your adjusted gross income on Form 1040.
— Using the AGI from line 11 on Form 1040, find your modified adjusted gross income with the student loan interest deduction worksheet.
— Complete lines 10 through 13 of the student loan interest deduction worksheet to find the allowable deduction amount.
— Enter this amount on line 21 of Schedule 1 for Form 1040.
Tips for Maximizing Your Student Loan Interest Deduction
It makes sense to maximize the deduction so you can reduce your taxable income as much as possible, which should help reduce your tax liability. There are a few things you can do to get the most out of your student loan interest deduction:
— Keep good records. Don’t miss out on a deduction because you lost your Form 1098-E; carefully record what you’ve paid and make sure you claim everything you’re entitled to.
— Explore other deductions. Because the amount you can deduct is affected by your MAGI, it’s worth making sure you’ve taken every applicable deduction to bring down your AGI before taking this deduction.
— Follow the news. Tax laws change often, so keep up with changes that may affect your personal financial situation. This includes any news related to possible student loan forgiveness or changes to repayment, including developments like the SAVE plan, which could lower your payments and decrease the interest you pay.
Making student loan payments — especially if your loans were previously eligible for a pause or forbearance — can alter your financial plans. Taking advantage of the student loan interest deduction as well as other educational credits and deductions can at least help to decrease your taxable income at tax time.
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How to Claim Your Student Loan Payments on Your 2023 Taxes originally appeared on usnews.com
