Make the tax grade on student loans

Did you or your child pay interest on a student loan last year? In that case, you may realize a tax benefit on your 2017 return.

Strategy: Seize a deduction for student loan interest. This deduction is claimed above-the-line, so it reduces adjusted gross income (AGI).

However, the write-off is phased out for higher-income taxpayers. Therefore, if your name is on the loan papers, you may not qualify for the tax break.

Here’s the whole story: The annual deduction is limited to the first $2,500 of interest paid on loans incurred to cover qualified educational expenses. These include tuition and fees; room and board; books, supplies and equipment; and other necessary expenses, such as transportation.

The loan proceeds can be used for your own education or schooling of your spouse or a dependent, as long as the student is enrolled on at least a part-time basis. But you qualify for the deduction only if you meet these five requirements.

1. You paid interest on a qualified student loan during the tax year.

2. You were legally obligated to pay the interest on the qualified student loan.

3. You do not use married filing separate status for your return.

4. You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s tax return.

5. Your modified adjusted gross income (MAGI) is less than the specified annual amount.

The MAGI limit is indexed annually for inflation, but increases in recent years have been minimal or nonexistent. For the 2017 tax year, the phase-out occurs for an MAGI between $65,000 and $80,000 for single filers; $135,000 and $165,000 for joint filers. (There’s no change for 2018.) Once you exceed the upper threshold, no deduction is allowed.

Tip: The new tax law doesn’t affect the deduction for student loan interest.