Most Americans don't itemize deductions on their tax returns, which means that most people can't take advantage of the mortgage interest deduction, the deduction for medical expenses, the state and local taxes (SALT) deduction, or even the deduction for charitable contributions.
However, there are some deductions that can be used even if you don't itemize. They're known as above-the-line deductions, and one that can be especially valuable to the millions of Americans with student loan debt allows interest paid on educational debt to be deducted. In this article, we'll take a closer look at the student loan interest deduction, and how much it could potentially save you on your taxes.
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How much student loan interest can you deduct on your taxes?
The short answer is that you can deduct $2,500 in student loan interest in both the 2020 and 2021 tax years. But there's a little more to the story.
First off, the student loan interest you deduct must have been paid during the tax year, not just billed. In other words, if you were billed a total of $3,000 in student loan interest for the year but your repayment plan only required you to pay a total of $1,000, that's all you're allowed to deduct.
Furthermore, the $2,500 limit is per tax return, not per person. So, married couples can only deduct a total of $2,500 in student loan interest, even if both spouses paid student loan interest during the year.
Finally, not everyone qualifies for the deduction. We'll get into the specifics in the next section, but you need to meet certain income requirements as well as requirements pertaining to the student loans themselves.
Do you qualify for the student loan interest deduction?
To claim the student loan interest deduction, you need to meet three types of qualifications:
- You must have paid student loan interest during the year.
- Your income must be below a certain threshold.
- Your debt must meet the IRS definition of "student loan debt."
We already discussed the first requirement, so let's take a look at the other two.
Student loan interest deduction income limitations
The student loan interest deduction is designed to give a tax break to low- to middle-income Americans who make student loan payments. So, high earners cannot take advantage.
If your modified adjusted gross income (MAGI) exceeds a certain threshold, the ability to take the student loan interest deduction starts to go away, meaning that you're only eligible for a partial deduction of your student loan interest. This is known as a "phase out." Then, if your MAGI exceeds an even higher threshold, you can't use the deduction at all.
For both the 2020 and 2021 tax years, here's the student loan interest deduction phase-out limitations:
|
2020 Tax Filing Status |
Deduction starts to phase out with MAGI above... |
Deduction is eliminated completely with MAGI above... |
|---|---|---|
|
Single, head of household, qualified widow(er) |
$70,000 |
$85,000 |
|
Married filing jointly |
$140,000 |
$170,000 |
Data source: IRS. Note: If you use the married filing separately status, you can't use the student loan interest deduction at all.
Does your student loan qualify?
The second factor you need to know about is how to tell whether your student loan debt qualifies for the deduction.
In a nutshell, for a loan to be considered a "student loan" in the eyes of the IRS, it must have been taken out for the sole purpose of paying qualified education expenses for you, your spouse, or a dependent at the time the loan was obtained. And the student must have been enrolled on at least a half-time basis in a degree, certificate, or credential program at the time.
However, the loan doesn't need to be an official student loan. Clearly, if you obtain a federal direct student loan, it's generally eligible for the deduction. But if you obtained a personal loan, home equity loan, or even used your credit card to pay qualified education expenses, it meets the definition of a student loan.
So, what are qualified educational expenses? This is a broad term that refers to tuition and fee expenses, room and board, books, supplies and equipment that are necessary for attendance, as well as certain other expenses as defined by the IRS. To qualify, the expenses need to occur within a reasonable amount of time before or after you took out the loan, which the IRS defines as within 90 days before or after the academic period starts and ends. In other words, you can't pay tuition and then attempt to call a personal loan you obtained two years ago "student debt."
How much could you save?
There's no simple answer here, as the potential tax savings depends on your marginal tax rate, or tax bracket. But as an example, if you're in the 22% tax bracket, deducting $2,500 in student loan interest could lower your tax bill -- or increase your refund -- by $550. While this doesn't completely offset the interest you pay on your student loans, it can certainly help to lessen the financial burden.
