Updated: Aug 27, 2019
Every student loan payment you make allocates your payment between the following:
The loan principal (the total amount borrowed) and
The loan interest (an annual percentage of the loan outstanding).
Up to $2,500 of that loan interest qualifies for the Student Loan Interest Deduction. You can claim the deduction if all of the following apply:
You paid interest on a qualified student loan in tax year 2018;
You're legally obligated to pay interest on a qualified student loan;
Your filing status isn't married filing separately;
Your MAGI is less than a specified amount which is set annually; and
You or your spouse, if filing jointly, can't be claimed as dependents on someone else's return.
If you paid $600 or more of interest on a qualified student loan during the year, you'll receive a Form 1098-E, Student Loan Interest Statement (PDF), from the entity to which you paid the student loan interest. Up to $2,500 of the interest reported on Form 1098-E is reported on Form 1040 - your individual tax return. Please note that qualifying for the deduction means your taxable income (NOT your tax liability) will decrease by the deduction.
On the 2018 Form 1040, the student loan interest deduction is reported on Schedule 1, Line, 33. In the example below, the taxpayer qualifies for the full $2,500 deduction.
The deduction is then subtracted from Total Income on Form 1040, Page 2, Line 6 to calculate Adjusted Gross Income on Line 7. In the example below, Adjusted Gross Income on Line 7 is $2,799 ($2,500 Student loan interest deduction plus $299 deductible part of self-employment tax from Schedule 1) less Total Income on Line 6.
The student loan interest deduction decreased Adjusted Gross Income used to calculate Taxable Income on Line 10. The applicable tax rate is then applied to Taxable Income to determine the taxpayer's tax liability or refund.
Although the reduced taxable income will impact some more than others, the student loan interest deduction is a helpful relief for those of us who carry the burden of student loan debt.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.