CPA Exam — REG (Regulation)Federal Taxation of IndividualsHard
A single taxpayer has an Adjusted Gross Income (AGI) of $120,000. They paid $5,000 in student loan interest during the year. What is the maximum student loan interest deduction they can claim?
- A$3,500
- B$0
- C$2,500
- D$5,000
Show answer & explanationAnswer & explanation
Correct answer: B. $0
The maximum student loan interest deduction is $2,500. However, the deduction is phased out for taxpayers with modified AGI between $75,000 and $90,000 for single filers ($155,000 and $185,000 for married filing jointly) for 2023. Since the taxpayer's AGI of $120,000 is above the upper limit of the phase-out range ($90,000), they are not eligible for any student loan interest deduction.
Why the other options are wrong
- A. This option is incorrect as it does not align with the statutory limits or phase-out rules.
- C. This is the maximum deduction limit, but the taxpayer's income exceeds the phase-out range.
- D. This option incorrectly assumes the full amount paid is deductible, ignoring both the statutory limit and the AGI phase-out.
Student Loan Interest Deduction
Taxpayers can deduct qualified student loan interest paid, up to a maximum of $2,500 per year, subject to AGI phase-out limitations.
- Maximum deduction is $2,500 per year.
- Deduction is 'above-the-line' (an adjustment to income).
- Subject to AGI phase-out thresholds, which differ by filing status.
Memory trick: Student loan interest is deductible, but your 'AGI Grades' must be good enough.