Guidelines for deducting interest on student loans

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A good education is a precious commodity. It can even pay you off at tax time if you’ve taken out a loan to further your education.

You may be able to deduct up to $ 2,500 from the interest you paid on a student loan last year. Your interest will be reported on Form 1098-E or a similar document you receive from the lender. If the amount of interest shown on this form is less than $ 2,500, you can only deduct the actual amount of interest you paid.

However, any amount you can deduct will help lower your taxable income, which may help lower your tax bill.

Submission requirements

You don’t need to itemize to get the student loan interest deduction, but it’s not available for Form 1040EZ declarants. Instead, you have to file one of the longer returns. Tax relief is one of the income adjustments, also known as standard deductions, that can be found directly on Form 1040A (line 18) and Form 1040 (line 33).

The IRS also has a filing status restriction with respect to the student loan deduction. If you are married, you cannot file separately and benefit from this tax break. Married couples must jointly file to claim the student loan interest deduction.

Regardless of your filing status, if you may qualify for an exemption on someone else’s tax return, you are not eligible for this deduction even if you made the interest payments on the student loan.

Student and school diplomas

The student for whom the loan has been taken out must be you, your spouse or a dependent. A dependent is not necessarily a parent, but it should be someone who receives most of their support from you.

The IRS also requires that the qualifying student be enrolled at least part-time in a program leading to a diploma, certificate, or other diploma.

The school must also be an eligible educational institution. It is a college, university, vocational school, or other post-secondary institution that meets the Student Aid Program guidelines administered by the US Department of Education.

Loan guidelines

Interest payments are deductible over the life of the loan, making those long-term college debts a bit more taxable. But there are other guidelines that you must follow.

You must have taken out the loan only to pay the tuition fees. This means you can’t add tuition fees to a personal loan and expect the IRS to approve interest deductibility.

And don’t soak twice. If you use the proceeds of a home equity loan to pay for your education, that interest may be deductible as qualifying mortgage interest, but you also cannot use it to claim the student loan interest deduction.

The loan and the interest paid on it cannot come from a related person. You also cannot deduct the interest you paid on a loan you got from a qualifying plan offered by your employer.

You have to use the loan to pay for the qualified higher education expenses. These include tuition and fees, room and board, books, supplies, equipment and other necessary expenses, such as transportation.

These expenses must have been incurred or paid within what the IRS calls a “reasonable time” before or after obtaining the loan. This usually means that costs can be attributed to a particular academic period, such as a semester, trimester, or trimester. The IRS also accepts tuition payments made within 90 days of the start or after the end of that academic session as reasonable.

A good option for a financially troubled student is to position the IRS to help you with your loan repayments. Even if someone else is making payments on your behalf, if you are legally required to pay principal and interest, you can deduct these third-party interest payments on your tax return. The IRS views such situations as if you received the loan payment money from the third party and then used it to pay off your student loan and interest.

Income Limits

Also keep in mind that like many other tax breaks, the IRS limits the deduction of interest on student loans if you earn more than a certain amount.

The phase-out range amounts are based on your Modified Adjusted Gross Income, or MAGI, and are adjusted annually for inflation. For most taxpayers, MAGI is adjusted gross income with some other tax deductions or income exclusions added.

In the 2014 income tax returns, the amount of your student loan interest deduction is gradually reduced if you are a single, head of household, or eligible widower or widower with a modified adjusted gross income between $ 65,000 and $ 80,000. The income phase-out range for married couples filing jointly is $ 130,000 to $ 160,000.

Once you earn more than the income range for your status, you can no longer deduct interest on your student loan.

For more details on the interest deduction for student loans, see Chapter 4 of IRS publication 970, Tax Benefits for Education.


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