The student loan interest deduction is great way to save money on your taxes, especially for cash-strapped recent graduates. However, not everyone is eligible to deduct the interest they pay on student loans. The IRS restricts access to the deduction based on income.
Here are the income limits that apply to the student loan interest deduction for 2012 taxes. Note that prior tax years have slightly different income limits:
Single filers with a modified adjusted gross income (MAGI) below $60,000 and married couples filing jointly with incomes below $125,000 can take the full deduction.
Taxpayers whose MAGIs are above these limits can only take a reduced deduction or no deduction at all. The deduction phases out between MAGIs of $60,000 and $75,000 for single filers. For married couples filing jointly, the deduction phases out between MAGIs of $125,000 and $155,000.
Taxpayers with MAGIs above the $75,000/$155,000 income limit cannot take the deduction at all.
How to claim the deduction
If your income falls below the phase out levels, you can deduct up to $2,500 of the interest you paid on student loans. Your lenders should send you a Form 1098-E [Student Loan Interest Statement] letting you know how much interest you can claim on your taxes. Note that they are not required to send you a 1098-E for less than $600. You can then claim the total amount from all your 1098-Es up to $2,500.
The good news is that the student loan interest deduction is an above-the-line deduction, which means that anyone can take it, whether you itemize deductions or claim the standard deduction.
For those who don’t know, the student loan interest deduction allows you to deduct the interest you paid on student loans. You can take the deduction if you paid interest on a student loan for yourself, your spouse, or a dependent. Note that the deduction does not apply to loans by family members to students. So if you try to claim a deduction for the interest you’re paying mom and dad, the IRS isn’t going to buy it.
If you haven’t filed your 2012 taxes, do so now.
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