Generally the interest you paid during 2013 for your student loans can result in an adjustment to your income which reduces your taxable income. Such an adjustment has the added benefit of lowering your adjusted gross income thereby increasing the amount of medical expenses that you can deduct. Generally, the amount you may deduct is the lesser of $2,500 or the amount of interest you actually paid. The amount you paid in student interest is reported to you on Form 1098-E, Student Loan Interest Statement.
The rules for reporting student loan interest as an adjustment to income you can claim the deduction if all of the following apply:
•You paid interest on a qualified student loan in tax year 2013
•You are legally obligated to pay interest on a qualified student loan
•Your filing status is not married filing separately
•Your modified adjusted gross income is less than a specified amount which is set annually, and
•You and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return. The student loan interest is reported to you by the holder of the loan.
There is another limit that you have may impact your ability to take and adjustment to income for student loan interest. The amount determined above is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return).
Modified Adjusted Gross Income (MAGI) is calculated by adding back certain items to your Adjusted Gross Income. Your Adjusted Gross Income (AGI) can be found on line 38 of your Form 1040; line 22 of your Form 1040A; or line 36 of your Form 1040NR.
The following items must be added to your Adjusted Gross Income (AGI) to calculate your Modified Adjusted Gross Income (MAGI):
- Traditional IRA contributions that were deducted.
One additional note about student loan payments that may be interest to you. If your monthly student loan payment is causing you financial strain you may be able to have the monthly payments reduced by applying for Income Based Repayment (IBR)
Advantages of IBR
• Pay based on what you earn—Under IBR, your monthly payment amount will be 15 percent of your discretionary income, will never be more than the amount you would be required to pay under the 10-year Standard Repayment Plan, and may be less than under other repayment plans.
• Interest payment benefit—If your monthly IBR payment amount doesn’t cover the interest that accrues (accumulates) on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans or Subsidized Federal Stafford Loans (and on the subsidized portion of your Direct or FFEL Consolidation Loans) for up to three consecutive years from the date you began repaying your loan under IBR.
• Limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance.
• 25-year forgiveness—If you repay under IBR and meet certain other requirements, any remaining balance will be forgiven after 25 years of qualifying repayment.
• 10-year public service loan forgiveness—If, while you are employed full-time for a public service organization, you make 120 on-time, full monthly payments under IBR (or certain other repayment plans) you may be eligible to receive forgiveness of the remaining balance of your Direct Loans through the Public Service Loan Forgiveness Program.
Mike Sargent CPA
A Master Tax Advisor of H&R Block at N88 W16624 Appleton Ave, Menomonee Falls, WI and SCORE volunteer