A  taxpayer is allowed a deduction in computing adjusted gross income (an above-the-line deduction) for interest (student loan interest) paid on qualified education loans. The maximum annual deduction is $2,500, but the amount otherwise deductible is phased out ratably for taxpayers with modified AGI of $50,000 to $65,000 ($100,000 to $130,000 for joint returns).

Example 1: Your client’s daughter, a single taxpayer, paid $3,000 in student loan interest in 2003 when her modified adjusted gross income was $40,000. She could deduct $2,500 of the interest she paid.

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