Paying off student loans can be a bear, but the one good thing is that you can deduct some of the interest paid to reduce your tax liability
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Quick Summary
- You can deduct up to $2,500 when filing taxes if you paid interest to a qualified student loan, alongside other criteria
- You cannot use the deduction if you are filing as: married, filing separately, make over certain income thresholds, or are claimed as a dependent on someone else’s tax return
- The $2,500 amount you can deduct also gradually decreases if you hit a certain phase-out MAGI threshold
- This deduction is considered ‘above-the-line’ and can be used in both your regular income taxes and the alternative minimum tax system
Do I Qualify?
Here’s a high level list of qualifications:
- You actually paid interest on a qualified student loan (most of your higher level education loans are qualified)
- You or your spouse are not claimed as a dependent on anyone else’s tax return
- Your Modified Adjusted Gross Income (MAGI) is less than a certain amount (see below)
- You are filing as ‘Single’ or ‘Married, Filing Jointly’.
Married, Filing Separately does not allow the SLI deduction. No one knows why.
How much can I deduct?
| Filing Status | Max You Can Deduct | MAGI Phaseout Threshold | MAGI Phaseout Limit |
|---|---|---|---|
| Single | $2,500 | $70,000 | $85,000 |
| Married, Filing Separately | You cannot claim this deduction | You cannot claim this deduction | You cannot claim this deduction |
| Married, Filing Jointly | $2,500 | $145,000 | $175,000 |
Put simply, how much you can deduct depends on 3 things:
- How much student loan interest you actually paid
- What your Modified Adjusted Gross Income (MAGI) is
- What your tax filing status is
So let’s walk through each individually
How much student loan interest did you pay?
This should be obvious, but you cannot deduct more than you paid. So barring all of the caveats above, if you only paid $500 in student loan interest, you would only be able to deduct, at max, $500. Your student loan provider should send out a 1098-E tax form at the start of every tax season to help you with this number.
What is your MAGI?
MAGI is one of those acronyms in the tax code that you don’t hear about often. This is because the MAGI is rarely used as it’s very similar to your AGI, and really only used for specific corner cases such as how much of your student loan interest you can deduct! Calculating MAGI can be a bit confusing, but our AMT Calculator AMT Calculator does all the work for you!
Otherwise, you can get your MAGI, or get a good rough estimate of your MAGI, simply by taking your total income and subtracting contributions to your traditional 401k and HSA Contributions. If you are self employed, there are a few extra things you can take off as well.
What is your filing status?
Your filing status determines the various phaseout thresholds mentioned above in the table. I’ll go over the calculations down below.
The most important thing to note here is - and I am repeating myself a bit - if you are filing as Married, Filing Separately, you cannot take the student loan interest deduction! Isn’t that crazy? I have no idea why. Ask Uncle Sam.
In addition, the maximum you can deduct on any single tax return is $2,500. That means it doesn’t matter if you’re filing as ‘single’ or if you’re ‘married, filing jointly’ and both of you have student loan interest paid, the max you can put down is $2,500.
So I can deduct $2,500, right? Not quite
To calculate the Student Loan Interest Deduction, follow 3 rules (and refer to the above table):
- If you make below the ‘MAGI Phaseout Threshold’, you can deduct up to the full $2,500
- If you make above the ‘MAGI Phaseout Limit’, you cannot deduct anything
- If you make between the MAGI phaseout threshold and the limit, follow the below steps:
- Subtract the phaseout threshold from your MAGI
- Divide that number by $15,000 if you are filing as single, and by $30,000 if filing as married
- You should end up with a ‘multiplier’ between 0 - 1, rounded to 3 digits (i.e. 0.621)
- Take the amount you actually paid (up to $2,500) and multiply it by the multiplier
- Subtract the number you got in step 4 from amount you actually paid (up to $2,500)
Confused? Let’s walk through some examples
Example 1: Single, but Over the Phaseout Limit
Bob is projected to pay $750 in student loan interest this year. His total income is $120,000. He is a single filer and contributed the max to both his HSA ($3,650) and Traditional 401k ($20,500). That means his MAGI is $95,850. Because his MAGI is above the Phaseout Limit of $85,000 as a single filer, he cannot deduct any of his student loan interest.
Example 2: Married, and Under the Phaseout Threshold
Tarzan and Jane are projected to pay $3,000 in student loan interest this year. Tarzan is still in school but Jane is in her first year of work and has a total income of $140,000. They are married and are planning to filing jointly. Jane is not offered an HSA at work but she did max out her contributions to her Traditional 401k ($20,500). Tarzan, being a full time student with no part time job, is not contributing to either a 401k or HSA.
That means their joint MAGI is $119,500. Because their MAGI is below the Phaseout Limit of $145,000 for ‘married, filing jointly’, they can deduct the max amount, which is $2,500 even though they paid $3,000 in student loan interest.
Example 3: Single, and in between Phaseout Threshold and Limit
Karen is single and ready to mingle, and is projected to pay $1,000 in student loan interest for the year. She has a total income of $85,000. She’s decided to contribute to a Roth 401k instead of a Traditional 401k but does have a High Deductible Health Plan through work which offers a HSA that she maxed out for the year ($3,650). That means her MAGI comes out to $81,350.
Because she is between the Phaseout threshold ($70,000) and limit ($85,000), she has to do some math to determine how much of the $1,000 that she paid in interest she can actually deduct. Per our steps outlined above, here’s how to do the math:
| Step by Step | Value |
|---|---|
| Subtract phaseout threshold from her MAGI | 81,350 - 75,000 = 6,350 |
| Divide that number by 15,000 (as a single filer) to get her multipler | 6,350 / 15,000 = 0.423 |
| Multiply the interest actually paid by the multiplier determined | 1,000 * 0.423 = 423 |
| Subtract that number from the interest she actually paid | 1000 - 423 = 577 |
That means when Karen is filing out her tax form she would only deduct $577!