A deduction of up to $2,500 is allowed for interest paid by the taxpayer during the year on qualified student loans. Deductible interest includes voluntary payments made during a period when interest payments are not yet required, interest on refinanced and consolidated loans, and capitalized interest.
Summary of the Student Loan Interest Deduction
|Loan qualifications||The student loan:
(a) must have been taken out solely to pay qualified education expenses, and
(b) cannot be from a related person or made under a qualified employer plan.
|Student qualifications||The student must be:
(a) the primary taxpayer, spouse, or dependent, and
(b) enrolled at least half-time in a degree program
|Time limit on deduction||The interest paid can be deducted during the remaining period of the student loan.|
|MAGI phaseout||MFJ: Over $140,000 but less than $170,000.
All others: Over $70,000 but less than $85,000.
|MAGI limit||MFJ: $170,000
All others: $85,000
The taxpayer can take the student loan interest deduction only if all of the following apply:
- They paid interest on a qualified student loan.
- Their filing status is not married filing separately.
- Their MAGI is less than $85,000 if filing single, head of household, or qualifying widow(er), and less than $170,000 if married filing jointly.
- They, or their spouse if filing jointly, are not claimed as a dependent on someone else's tax return.
The amount of the deduction is affected by the taxpayer's modified adjusted gross income (MAGI). For the purpose of calculating the student loan interest deduction, MAGI is calculated by taking the AGI and adding back the following items:
- Any student loan interest deduction already included on Schedule 1
- The foreign earned income exclusion
- The foreign housing exclusion
- The foreign housing deduction
- Income excluded by bona fide residents of American Samoa (calculated on Form 4563)
- Income excluded from Puerto Rico
A related person includes:
- A spouse
- Siblings, i.e., brother, sister, half brother, and half sister
- Ancestors, i.e., parents and grandparents
- Lineal descendants, i.e., children and grandchildren
- Certain corporations, partnerships, trusts, and exempt organizations.
(See IRC section 267(b) for more information.)
Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more on one or more qualified student loans will send a student loan interest statement to the borrower using either IRS Form 1098-E or an equivalent.
To enter student loan interest in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Student Loan Interest Deduction
- Total Interest Paid on Qualified Student Loans - Enter the amount of interest.
- Amount to Add to/Subtract from Modified AGI - If the tax return includes Form 2555 or the taxpayer is excluding income from American Samoa or Puerto Rico, MAGI may need to be adjusted. Use Worksheet 4-1 in Publication 970 for this purpose, and enter here the amount of adjustment needed so that modified AGI in this menu equals worksheet line 9.
Note: This is a brief guide on the student loan interest deduction and including it in a return prepared in TaxSlayer Pro. This is not intended as tax advice.
IRS: Publication 970 - Tax Benefits for Education