The starting point is that "there shall be allowed as a deduction for the taxable year an amount equal to the interest paid by the taxpayer during the taxable year on any qualified education loan".
26 USC § 221(a). If that amount is more than $2,500, then $2,500 is used instead. 26 USC § 221(b)(1).
So, after applying only those provisions, the amount "allowed as a deduction" is the
lesser of (1) the amount that the taxpayer can actually claim, and (2) the statutory maximum. The next paragraph then says that "[t]he amount which would (but for this paragraph) be
allowable as a deduction" is phased out according to a given formula. 26 USC § 221(b)(2) (emphasis added).
This is inartful drafting because when Congress first introduces the deduction, it defines the amount "allowed as a deduction", but then when it introduces the phaseout, it refers instead to the amount "allowable as a deduction" -- hence your question, is this referring to the maximum allowable, or the amount actually allowed? The statute is, at least arguably, ambiguous. This is an example of a situation where "[f]illing gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation".
Mayo Foundation v. United States, 562 US 44,
131 SCt 704, 713 (2011). In this case, the "interpretive choice[]" is found in a regulation promulgated by the Secretary of the Treasury and codified at
26 CFR 1.221-1(d)(1), which says that "[t]he deduction
allowed under section 221 is phased out ratably ..." (emphasis added). So, under the regulations, the Secretary of the Treasury has made it clear that it is the amount "allowed" that is phased out after all, which, as one will recall, is defined to be the lesser of the amount of interest actually paid or the maximum.
Hence, the amount that is subjected to phasing out is the actual interest paid, unless that is greater than the maximum, in which case, the maximum is phased out. As I've observed many times, IRS publications are not the law, e.g.,
Zimmerman v. Commissioner,
71 TC 367, 371 (1978), aff'd without opinion 614 F 2d 1294 (2nd Cir 1979), but this analysis is consistent with
Worksheet 4-1 included in Publication 970.
