Question

Why might a student who is claimed as a dependent on another person's tax filing (e.g. that of their spouse or their parents) be prohibited from taking the student loan interest deduction? If the student is permitted to take the deduction on their tax filing, why might the deductible amount be reduced depending on the student's Modified AGI?

Answer 1

1. A individual who is actually paying the interest and repayment amount can only claim the student loan interest deductions. So if a child is not dependent on the parents tax returns then the parents cannot claim the student loan interest deductions. Similarly if the child is dependent on the parent’s tax returns then parents are liable to pay back the loan to be able to deduct this interest.

So now, if the child is dependent on the parent’s tax returns then the child cannot claim the deductions but the parents will be able to claim it.

2. The student loan interest deduction amount depend on the income of the individual.

Total of up to $2500 is eligible as deduction from the income. Now, the student loan interest can be deducted if the income is below $65000 and it gradually decreases as the income rises up to $80000 and above it is eliminated So for example, if the income of the individual is $75000 and they pay interest of $2000, then the student loan deduction will be calculated as below:

2000* (75000-65000)/(80000-65000)        = 2000* 0.6667= 1333.33

So the interest deduction will be = 2000-1333.33= 666.67

Now if the income rises to 78000, the deduction will be ,

2000* (78000-65000)/(80000-65000)= 2000* 0.8667= 1733.33

So the deduction will be =2000-1733.33= 266.67

So, as seen above, the deduction amount decreases with increase in income.