Interest payments made on student loans are deductible for adjusted gross income or “above the line”. This means that a taxpayer can deduct the interest whether or not he or she has chosen to itemize deductions for the tax year. For 2012, eligible taxpayers may deduct up to $2,500 of interest expense on a qualified education loan under Code Section 221.
Deduction Phase Out
The deduction begins to phase out for single taxpayer with adjusted gross income between $60,000 and $75,000 and for joint filers with adjusted gross income between $120,000 and $150,000. Married taxpayers filing separately may not take the deduction according to the IRS.
Individuals that can be claimed as a dependent by another taxpayer for the tax year beginning in the calendar year in which the individual’s tax year begins are not eligible for the deduction.
In 2012, Jacob paid $1,800 of interest on a qualified education loan. His modified adjusted gross income was $66,000. Jacob is single, which means his deduction for qualified student loan interest is phased out by the ratio of his excess adjusted gross income divided by $15,000 ($6,000/$15,000). This means that the deduction is reduced by 40% ($6,000/$15,000). This means that Jacob will have a total deduction of $1,080 (60% times $1,800).
To be eligible for the deduction, the educational loan must be used to pay for:
3. Room and board
4. Books and supplies
5. Other related expenses
If one of your items does not fall under these categories, it would be best to as a professional for assistance on determine whether your expense qualifies.