Question

Lionel is an unmarried law student at State University Law School, a qualified educational institution. This year Lionel borrowed $24,000 from County Bank and paid interest of $1,440. Lionel used the loan proceeds to pay his law school tuition. Calculate the amounts Lionel can deduct for interest on higher-education loans under the following circumstances:

b. Lionel's AGI before deducting interest on higher-education loans is $79,000.

what is deductible interest expense?

Answer 1

Considering the tax year as 2019, the maximum allowable deduction of interest on student loan is limited to $2500 if the Modified AGI is less than $70000.

Further, the phase-out begins at $70000 and ends at $85000.

Since, the AGI of $79000 mentioned here is before deducting the interest loan deduction, hence the same can be considered as Modified AGI. We need to calculate the amount of deduction disallowed which is calculated as below:

(Modified AGI - Phase-out begin Modified AGI) / (Phase-out end Modified AGI - Phase-out begin Modified AGI) X Amount of Interest on student loan paid

= (79000 - 70000) / (85000 - 70000) X 1440

= (9000) / (15000) X 1440

= 0.6 X 1440

= 864

Hence, the final amount of deduction allowed for Student Loan interest to Lionel = Total Interest paid - Amount disallowed

= 1440 - 864

= $576