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Taxmap/pubs/p970-022.htm#TXMP1ae8d0d7 Figuring the Deduction

Deduction

Your student loan interest deduction for 2004 is generally the smaller of:

1. $2,500, or
2. The interest you paid in 2004.

However, the amount determined above may be gradually reduced (phased out) or eliminated based on your filing status and modified adjusted gross income (MAGI) as explained below. You can use Worksheet 4-1 (at end of chapter) to figure both your MAGI and your deduction.

Taxmap/pubs/p970-022.htm#TXMP77d061ba Form 1098-E.

To help you figure your student loan interest deduction, you should receive Form 1098-E. Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2004 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2005.

For qualified student loans taken out before 2005, the institution is required to include on Form 1098-E only payments of stated interest. Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. See Allocating Payments Between Interest and Principal, earlier.

The lender may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the borrower's name, address, and taxpayer identification number. The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses.

Taxmap/pubs/p970-022.htm#TXMP73e85cf7 Effect of the Amount of Your Income on the Amount of Your Deduction

Effect of the Amount of Your Income on the Amount of Your Deduction

The amount of your student loan interest deduction is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $50,000 and $65,000 ($100,000 and $130,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $65,000 or more ($130,000 or more if you file a joint return).

Taxmap/pubs/p970-022.htm#TXMP69d5a2c4 Modified adjusted gross income (MAGI).

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest.

Taxmap/pubs/p970-022.htm#TXMP67560c3a MAGI when using Form 1040A.

If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any amount on line 18 (Student loan interest deduction) or line 19 (Tuition and fees deduction).

Taxmap/pubs/p970-022.htm#TXMP296a7e5c MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 37 of that form figured without taking into account any amount on line 26 (Student loan interest deduction) or line 27 (Tuition and fees deduction), and modified by adding back any:

1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion of income for bona fide residents of American Samoa, and
5. Exclusion of income from Puerto Rico.

Table 4-3, on the next page, shows how the amount of your MAGI can affect your student loan interest deduction.

Taxmap/pubs/p970-022.htm#TXMP7d30de1b Phaseout.

If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. To figure the phaseout, multiply your interest deduction (before the phaseout) by a fraction. The numerator is your MAGI minus $50,000 ($100,000 in the case of a joint return). The denominator is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before the phaseout). This result is the amount you can deduct.

Taxmap/pubs/p970-022.htm#TXMP076f2f87
Example 1.

During 2004 you paid $800 interest on a qualified student loan. Your 2004 MAGI is $125,000 and you are filing a joint return. You must reduce your deduction by $667, figured as follows.

$800

×

$125,000 - $100,000 $30,000

=

$667

Your reduced student loan interest deduction is $133 ($800 − $667).

Taxmap/pubs/p970-022.htm#TXMP3633b008
Example 2.

The facts are the same as in Example 1 except that you paid $2,750 interest. Your maximum deduction for 2004 is $2,500. You must reduce your maximum deduction by $2,083, figured as follows.

$2,500

×

$125,000 - $100,000 $30,000

=

$2,083

In this example, your reduced student loan interest deduction is $417 ($2,500 − $2,083).

Taxmap/pubs/p970-022.htm#TXMP28f5e12d Which Worksheet To Use

Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1.

Previous Page:  Publication 970 - Tax Benefits for Education - Who Can Claim a Dependent's Expenses Next Page:  Publication 970 - Tax Benefits for Education - Claiming the Deduction Use     to find additional instances of index items.