How to Claim Student Loan Interest Deduction

If you have a qualified student loan, you may be able to deduct up to $2,500 interest you paid on the loan each year on your federal income tax return.

Step 1: Determine whether you have a qualified student loan.

According to IRS Publication 970, You have a qualified student loan if you meet the following criteria:

1. You took out the loan solely to pay qualified education expenses which include tuition and fees, room and board, book, supplies, equipment and other necessary expenses.
2. The loan is for you, your spouse or a person who was your dependent when you took out the loan.
3. You paid or incurred within a reasonable period of time before or after you took out the loan.
4. The loan is for education provided during an academic period for an eligible student that enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.
5. The loan is not from a related person or a qualified employer plan.

Step 2: Determine whether you can claim the deduction.

You can claim student loan interest deduction if you meet all of the requirements below:

1. You paid interest on a qualified student loan.
2. You are legally obligated to pay interest on a qualified student loan. 
3. You are not claimed as a dependent on another taxpayer's return.
4. Your filing status is not married filing separately.
5. Your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return).

Step 3: Collect information for deduction.

1. Form 1098-E, Student Loan Interest Statement. You should receive this statement from your lender if you paid over $600 interest during a year. The interest you paid is reported on Box 1 of Form 1098-E.

2. Account statements from your lender. If you paid less than $600 interest during a year and didn't receive Form 1098-E, you will need to use these statements to figure out the amount of interest paid. 

If you paid loan origination fees or have capitalized interest that were not reported as interest on Form 1098-E, you may see the example under section "Allocating Payments Between Interest and Principal" of Chapter 4 Student Loan Interest Deduction on Publication 970. This example explains how to deduct interest, loan origination fees and capitalized interest.

Step 4: Figure out the amount of interest you can deduct.

For 2016, the maximum student loan interest you can deduct is $2,500. Your deduction will be reduced if your modified adjusted gross income (MAGI) is between $65,000 and $80,000 ($130,000 and $160,000 if married filing jointly).

1. If your Modified Adjusted Gross Income (MAGI) for 2016 is less than $65,000 ($130, 000 if married filing jointly), your deduction is the smaller of $2,500 or interest you paid in 2016.

2. If your Modified Adjusted Gross Income (MAGI) for 2016 is between $65,000 and $80,000 ($130,000 and $160,000 if married filing jointly), use the formula below to calculate the deduction.

Single, head of household, or qualifying widow(er)

Interest paid x [1- (MAGI-65,000)/30,000]

Married filing joint return

Interest paid x [1- (MAGI-130,000)/30,000]

Note: Interest paid is the smaller of $2,500 or interest you paid in 2016.

If you use a tax software to prepare your return, the software will calculate the deduction for you once you answered all the questions related to the student loan.

Step 5: Claim the student loan interest deduction on your return.

Enter the amount of student loan interest deduction on:

Line 33 of Form 1040 or,

Line 18 of Form 1040A or,

Line 33 of Form 1040NR or,

Line 9 pf Form 1040NR-EZ.

For more information, please see IRS Publication 970.

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