What Is the Student Loan Interest Deduction? A Simplified Overview

Many school students aren’t any strangers to student loans. A typical supply of economic assist, U.S. News & World Report signifies that the typical student loan debt for school grads is now over $30,000. This is a 26% enhance over what the everyday student owed roughly a decade in the past.

Repaying student loans entails not solely paying again the unique quantity borrowed but in addition any accrued curiosity. If you might be at present paying curiosity on a student loan, you could be focused on studying extra concerning the federal authorities’s student loan curiosity deduction.

The Student Loan Interest Deduction Explained

Under Topic No. 456, the Internal Revenue Service (IRS) shares that the student loan curiosity deduction permits people to deduct as much as $2,500 in curiosity paid on certified student loans throughout the tax 12 months. This deduction applies to curiosity that you just have been required to pay in addition to any curiosity that you just voluntarily selected to pay prematurely.

Notice that the deduction is just for “qualified” student loans. According to the IRS, a certified student loan is a loan taken out solely for “qualified” larger training bills for you, your partner, or your dependent. This loan should even be for the training of an “eligible” student.

Does this definition make your head spin? If it does, it’s actually comprehensible. That’s why it’s essential to dig a bit deeper to be taught extra about how the IRS defines all of those necessities.

Defining the Terms “Qualified” and “Eligible”

In chapter 4 of Publication 970, the IRS explains {that a} loan from somebody you might be associated to or that’s acquired below a certified employer plan does not meet the certified loan commonplace. So, in case your grandparents loaned you cash to pay in your training, as an illustration, you can not deduct any curiosity you paid on these monies below the student loan curiosity deduction.

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What does the IRS think about certified larger training bills? Tuition, charges, room and board, books and provides, and transportation to and from class are all certified bills. That mentioned, if any of these things have been lined below different tax-free applications, reminiscent of tax-free scholarships and fellowship grants, they have to be decreased.

Additionally, an eligible student is outlined as “a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.” If enrolled much less time than that, the deduction can’t be taken.

Income-Based IRS Deduction Eligibility Requirements

If all the above circumstances are met, this nonetheless doesn’t imply that you just qualify for the student loan curiosity deduction as one different eligibility requirement should even be met. This requirement is expounded to earnings.

For the 2020 tax 12 months, in case your modified adjusted gross earnings (MAGI) was lower than $70,000 as a person or $140,000 if submitting collectively, you certified for the deduction. If your MAGI was greater than these quantities, the deduction would begin to be decreased.

Taxpayers with a MAGI that exceeded $85,000 individually or $170,000 collectively have been unable to assert this deduction in any respect. That makes this program much like different types of income-based student monetary assist applications.

How to Claim the Student Loan Interest Deduction

The first step to claiming the student loan curiosity deduction is ensuring you meet the MAGI qualification. Once you confirm that you just do, you have to then calculate how a lot you paid in student loan curiosity.

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The IRS gives a Student Loan Interest Deduction Worksheet that can assist you do each. Institutions that obtain curiosity funds exceeding $600 for the 12 months are additionally required to ship you Form 1098-E. This type is named a Student Loan Interest Statement and incorporates the quantity of student loan curiosity the establishment acquired from you that calendar 12 months.

Remember that the utmost deduction allowed is $2,500 for the tax 12 months, so you can not deduct greater than this quantity. And if you happen to paid much less, it’s the lesser quantity that’s deducted.

Have More Questions concerning the Student Loan Interest Deduction (or Financial Aid)?

Like many tax-related applications, the student loan curiosity deduction could be considerably complicated. The use of quite a few ambiguous phrases reminiscent of “qualified” and “eligible” doesn’t assist once you’re attempting to determine whether or not this explicit program applies to you.

Checking along with your tax advisor may also help you identify what sort of reduction you may get in your academic bills. You may also contact Saint Leo University’s Student Financial Services Office to be taught extra about your monetary assist choices.

Our employees will assist in any means we will, connecting you to the assets designed to make your academic pursuits extra inexpensive given your scenario and earnings. You can contact the workplace by cellphone at (800) 240-7658 or through e-mail at [email protected]