$2,500 Student Loan Interest Tax Deduction: Who Will Get It and How Much

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Interest on federal student loans began accruing again on September 1 last year. However, some tax relief is available for millions of Americans who restarted student loan payments thanks to the student loan interest tax deduction. Such student loan borrowers could be eligible for a break on their 2023 taxes.

Which expenses qualify for the deduction?

Interest on federal student loans started accruing on Sept. 1, 2023, and the first payment for millions of Americans was due in October 2023. According to the IRS, student loan borrowers may be able to deduct at least some of the interest paid on student loans from their taxable income.

At the time of the COVID-19 pandemic, the federal government paused the interest accrual on eligible student loans for more than three years. The student loan interest tax deduction allows borrowers to deduct up to $2,500 on interest paid (on eligible private or federal education debt) from their taxable income.

In addition to interest payments, borrowers can also claim a deduction for capitalized interest, loan origination fees, and interest on refinanced and consolidated student loans. The deduction applies to all student loans to pay for higher education expenses for yourself, your spouse or your dependent.

No deduction is available for employer-paid interest under educational assistance programs and interest paid from tax-free qualified tuition plans, such as 529 plans. Eligible borrowers can claim the student loan interest tax deduction as an adjustment to income. This means that borrowers don’t need to itemize their deductions.

Student loan interest tax deduction: who can get it?

To qualify for a student loan interest tax deduction, a borrower must:

  • Have paid interest on eligible student loans in tax year 2023.
  • Be legally obligated to pay interest on eligible student loans.
  • Not have a filing status of married filing separately.
  • Have a modified adjusted gross income below $90,000.
  • Not (borrower and spouse) be claimed as a dependent on someone else’s return.

If the child pays off the loan (provided they are legally obligated), but the parents or someone else claims the child as a dependent, then no one will get the deduction.

Also, if parents or someone else pays a loan they are not obligated to pay, they won’t get the deduction. Instead, the person they made the payment for may claim the deduction if they meet the income limit and are not claimed as a dependent. The tax department treats this as money gifted to the borrower who then makes the payment.

It must be noted that the deduction amount is gradually reduced for borrowers with modified adjusted gross income (MAGI) between $75,000 and $90,000 (between $155,000 and $185,000 for those filing a joint return). No deduction is allowed for borrowers with MAGI of $90,000 or more ($185,000 or more for those filing jointly).

Visit this link to learn more about the student loan interest tax deduction.