Last year Henry borrowed $15,000 to help pay for his dependent daughter's college tuition. This year Henry paid $2,800 of interest on the loan. How much, if any, interest can Henry deduct if he files single with AGI of $77,500?
What will be an ideal response?
$1,250.
The deduction for student loan interest is reduced for single taxpayers with AGI above $70,000 but below $85,000. The deduction is the amount paid up to $2,500, reduced by the phase-out percentage. The percentage is equal to $77,500 less $70,000, divided by $15,000. In this problem, there is a phase-out of 50 percent ($7,500 / $15,000), thereby reducing the amount paid up to $2,500 (in this case, $2,500) to a deduction of $1,250 [$2,500 - ($2,500 × ($7,500 / $15,000)) = $1,250].
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