Question

Simon graduated from Lessard University last year. He financed his education by working part-time and borrowing $16,000. During the current year, he pays $1,400 of interest on his student loan. a. If his adjusted gross income is $33,000, Simon can deduct $ of student loan interest. b. If his adjusted gross income is $77,000, Simon can deduct $

Answer 1

a.

$1,400

b.

$280

Step-by-step explanation:

According to Internal Revenue code the interest expense can only be deductible as adjusted gross income deduction, if the qualified education loan is used only for study credit, higher educational expenses like enrollment in the course, cost of books and accommodation cost.

a.

The maximum allowable interest deduction is $2,500.

Amount of Interest paid on the educational loan $1,400

Allowable deduction is Lesser of

• maximum allowable interest deduction of $2,500.
• Interest Payment on educational loan of $1,400.

b.

Adjusted Gross Income $77,000

Formula

Educational Interest rate = (AGI - $65,000) / $15,000

Placing values in the formula

Educational Interest rate = ($77,000 - $65,000) / $15,000

Educational Interest rate = 1.13 = 0.8%

Allowable interest deduction = [ (lesser of interest deduction or interest payment on the educational loan) x ( 1 - Educational interest rate)

Allowable interest deduction = $1,400 x ( 1 - 0.8 ) = $280