Student loan interest deduction: Parents and college students who have taken out loans to pay for their education might benefit greatly from the student loan interest deduction. The interest paid on student loans, up to a maximum of $2,500, can be deducted from an individual’s taxable income.
But since March 2020, federal student loan payments have been suspended; many may be unsure if they qualify for this tax credit.
There might not be any interest to deduct in 2022 if no payments were made. However, individuals may still claim the deduction if payments were made on non-federally owned loans, such as private student loans, or towards capitalized federal loan interest.
Who can deduct interest on student loans?
One’s modified adjusted gross income (MAGI) must be less than $70,000 ($145,000 if filing jointly) to qualify for the student loan interest deduction. Individuals with MAGIs ranging from $70,000 to $85,000 (or $175,000 if filing jointly) are not eligible to deduct the full $2,500.
It’s crucial to understand that this deduction is taken above the line, immediately lowering taxable income, rather than being an itemized deduction. Those who took out the loan for a dependent, made interest payments while enrolled in school, utilized the loan for approved educational expenses, or had repayment obligations are examples of qualifying individuals.
Those who paid more than $600 in interest in 2022 will automatically receive Form 1098-E, the student loan interest deduction form. If a person meets the qualifying requirements, they can still deduct the amount paid, even if the total interest paid was less.
The interest paid on student loans can be written off, which can result in significant tax savings, even though the total payment amount is not deductible.
To optimize tax savings, people should also investigate additional education tax benefits such as the lifelong learning credit, American opportunity credit, and tuition and fees deduction.