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What to Know About the Student Loan Interest Tax Deduction

Bruce McClary

Each January, W-2 forms begin arriving in mailboxes or are delivered by hand. Federal law states that these forms must be postmarked or delivered no later than Jan. 31. In addition, Form 1098-E, which is the student loan interest statement, is due at the same time to anyone who paid $600 or more in student loan interest in the previous year.

Despite discussions during the most recent tax overhaul to cancel the student loan deduction, the tax deduction for student loan interest is still in play for the tax year ending Dec. 31, 2018.

[Read: 5 Ways the New Tax Law Affects Families Paying for College.]

As a reminder, the tax filing deadline is April 15 for all taxpayers except those in Maine or Massachusetts, whose deadline is April 17. Those who file an extension need to remember that an extension only extends the time to file to Oct. 15, not the time to pay any taxes that are due. If an extension is filed, the taxpayer will need to estimate his or her tax liability and pay it by the April due date to avoid penalties.

Here's what borrowers should know about the student loan interest tax deduction as they begin preparing to file their taxes.

The Internal Revenue Service has capped the student loan interest deduction at $2,500 annually. This deduction is known as an above-the-line deduction and is one that can be taken whether a consumer itemizes deductions or not. This is because the "line" refers to adjusted gross income.

The actual amount of interest paid in 2018 is the only amount that can be used to determine the deduction; interest amounts that are less than $2,500 will reduce the taxable income by the amount actually paid.

If you don't have your 1098-E handy and aren't sure how much interest you paid, you should reach out to your student loan lender to verify the amount. Most servicer websites allow you to access your 1098-E form if you are logged into your account.

[Read: Know the Tax Implications of Eliminating Student Loans.]

One must meet a number of criteria to be considered eligible for the student loan interest deduction. First, the loan must be for qualified higher education expenses like tuition, fees, books and supplies, and the student must have been enrolled at least half time.

Second, the loan must be in the name of the person filing or a qualified dependent, or spouse, if married.

It is also important to know that married couples must file jointly in order to claim the deduction, which can only be used once. This is true even if both have student loans that they have paid interest on over the year and the combined interest amount exceeds $2,500.

[Read: Common Tax Filing Rules for Student Loan Credits, Deductions.]

The student loan interest tax deduction has income limitations. Individuals whose modified adjusted gross income is less than $80,000 and couples whose MAGI is less than $165,000 are eligible, but once those limits are reached, the deduction is no longer available.

In fact, beginning at $65,000 for single taxpayers, the amount of the deduction will begin to phase out until the $80,000 limit is reached. For married couples, the phaseout period begins at $135,000 and ends at $165,000. Note that the deduction is available to parents who claim their student as a dependent, but the same income limitations apply.

Finally, although the student loan interest deduction was not changed by the new tax law, one change did come out of the bill that affects anyone whose federal or private student loan was discharged due to permanent disability. This forgiven debt previously was taxed but the new law states that discharges that occur from 2018 to 2025 will not be taxed.

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