If you're a recent graduate (undergrad or grad school), the Student Loan Interest Deduction is a great way to benefit from your student loan interest payments at tax time. You can claim all the interest you paid during the tax year, including payments you've voluntarily made, as a deduction of up to $2,500. A deduction means a deduction from your taxable income, i.e., you can lower how much of your income the government can tax by up to $2,500.
What should I know about filing the Student Loan Interest Deduction?
First, if you attended school in the past year, you would do well to investigate other tax credits and deductions to find the best fit for your situation. Next, you don't need to itemize in order to claim the Student Loan Interest Deduction, but you do need to have a Modified Adjusted Gross Income (MAGI) of less than $80,000 ($160,000 if married and filing a joint return) in order to claim this benefits.
So let's say that your tax rate is 30% and you claim the full $2,500 Student Loan Interest Deduction on your income of $65,000. Without the deduction, you would have been taxed 30% of your income of $65,000, equal to $19,500 in taxes. With the deduction, however, you would apply that 30% rate to an income of $62,500, creating just $18,750 in taxes – a total savings of nearly $1,000.
Have more questions? Leave a comment, or check out the IRS's own website on the deduction here.