Taxpayers may deduct interest paid on student loans from federal adjusted gross income. This deduction could save you a significant amount of money, but you need to know how the deduction works so you can make sure to claim it properly.
The deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, and as explained below, the levels aren’t very high.
The maximum amount of interest you can deduct per year is $2,500.
The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain postgraduate programs also qualify. Therefore, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital or health care facility offering postgraduate training can qualify.
It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.
Phase-out amounts
For 2021, the deduction is phased out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 ($70,000 and $85,000 for single filers). Thus, the deduction is unavailable for taxpayers with AGI of $170,000 ($85,000 for single filers) or more.
For 2022, the deduction will be phased out for taxpayers who are married filing jointly with AGI between $145,000 and $175,000 ($70,000 and $85,000 for single filers). That means the deduction is unavailable for taxpayers with AGI of $175,000 ($85,000 for single filers) or more.
Married taxpayers must file jointly to claim this deduction.
No deduction is allowed to a taxpayer who can be claimed as a dependent on another’s return. For example, let’s say parents are paying for the college education of a child whom the parents are claiming as a dependent on their tax return. The interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child-student may pay on a loan he or she may have taken out. The child will be able to deduct interest that is paid in a later year when he or she is no longer a dependent.
The deduction is taken “above the line.” In other words, it’s subtracted from gross income to determine AGI. Thus, it’s available even to taxpayers who don’t itemize deductions.
Other requirements
The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his or her spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.
Taxpayers should keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem. However, care should be taken to document other qualifying education-related expenditures such as for books, equipment, fees and transportation.
Documenting room and board expenses should be straightforward for students living and dining on campus. Students who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.
Your Rudler, PSC advisor can help determine whether you qualify for this deduction or answer any questions you may have about it. Contact us at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Maria Graell, Staff Accountant and Matthew Topmiller, CPA.
If you would like to discuss your particular situation, contact Maria or Matt at 859-331-1717.
As part of Rudler, PSC's commitment to true proactive client partnerships, we have encouraged our professionals to specialize in their areas of interest, providing clients with specialized knowledge and strategic relationships. Be sure to receive future Rudler Reviews for advice from our experts, sign up today !