What to know about Taking the Student Loan Interest Deduction on your Federal and Massachusetts Tax Return

According to the Consumer Financial Protection Bureau, CFPB, almost 5 million college students graduate with student loan debt each year.  Here’s a quick overview of what you should know about the student loan interest deduction on your federal tax return.

If the student is repaying the loans:  

  • With that required monthly payment lingering over your head for the next 10 years or so, it will be good to know that there is a tax deduction that may help you feel less hostile about paying back your student loans. For federal purposes, an individual is able to deduct a maximum of $2,500 of student loan interest paid on undergraduate or graduate loans. You’ll find this on Page 1 of your Form 1040. Unfortunately, the limitation on the deduction does phase-out once a single taxpayer’s modified adjusted gross income exceeds $65,000 ($130,000 if a joint return).  Once the modified adjusted gross income for a single taxpayer exceeds $80,000 ($160,000 for a joint return), you will not receive any deduction amount.
  • However, if you are being claimed as a dependent on your parents’ tax return, neither you nor your parents can take the student loan interest deduction. The student is considered “legally obligated” to make the interest payments on that student loan.

 If the parents are repaying the loans:

  • If the parents pay the interest on behalf of the student, it is as if the student paid the interest since the student is legally obligated. The student is then able to claim the deduction on the interest paid by the parents, as long as they are not be claimed as a dependent on the parents’ tax return.
  • If the parents pay the interest on the student loan and claim the student as a dependent, neither the student nor the parents will be able to take the deduction on the student loan interest paid.

In addition to your federal tax return, there are additional issues to be aware of as a resident of Massachusetts: 

  • If you are a resident of Massachusetts, you are only allowed to deduct student loan interest paid on undergraduate education loans on your state tax return.
  • The upside with Massachusetts is there is no maximum amount of the deduction and there is no limitation if your modified adjusted gross income reaches a certain amount on your state tax return. The Federal rules regarding dependents unable to take the deduction, applies to Massachusetts as well.

 

There are many deductions for students and parents so it’s important to be proactive and make sure you are aware of them all and which ones apply to your situation.  Remember students may be claimed as dependents on parents’ tax returns for a few years after graduation, but that will change and so will the application of these tax deductions.

If you have questions about how these, or other, tax deductions may apply to your family, please contact us.  We’ll be glad to help.

 

Written by Lauren Newton

 

Sources:

  1. http://www.consumerfinance.gov/blog/a-new-years-resolution-to-conquer-your-student-debt/
  2. MA Department of Revenue Guide to Personal Income Tax http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/deductions/education-related-deductions.html#Student
  1. I.R.C. §221