Rules for claiming the student loan interest deduction
Can Mom and Dad get in on the deduction? This article from the National Association of Enrolled Agents explains it all.
The mortgage interest deduction is cherished by many, but the much-maligned student loan is another interest deduction not to be overlooked. Finally, an up-side to the student loan! Unlike the mortgage interest deduction, student loan interest is not taken as an itemized deduction on Schedule A, Form 1040. Instead, it's a modification to adjusted gross income (an above the line deduction). If you meet the requirements, you can deduct the amount of interest paid on a student loan from your total taxable income. And in some cases, parents can even reap the benefit. So, what criteria need to be met in order to take advantage of this tax saving opportunity?
The loan must be taken out solely to pay for qualified education expenses and the lender cannot be an individual - in other words, interest paid to Grandma cannot be deducted. A student who is no longer claimed as a dependent may be able to deduct the interest if his or her Modified Adjusted Gross Income (MAGI, in IRS-speak) is less than $75,000 (or $150,000 if filing a joint return) before subtracting the student loan interest. Two potential disqualifiers should be noted: taxpayers who file their return as married filing separately may not claim this deduction, and the student must be (or have been) enrolled at least half-time in a degree program.
For 2010, the maximum deductible interest per return is $2,500. If you paid $600 or more in interest on a qualified student loan during the year, you should already have received Form 1098-E from the lender. (If not, now's the time to call.) Keep in mind that refinancing the original loan for a higher amount and using even part of the loan money on items other than qualified education expenses will knock you out of the running for this deduction - for the interest to be deducted, a student loan must be used strictly for paying educational expenses.
But what if more than $2,500 went toward payment of interest on your student loans in 2010 and you'd like to see Mom and Dad be able to claim a little of that? First, be aware that parents can't claim a deduction for helping make payments on a loan that is in their child's name. The parents must be personally liable for the loan, but co-signing counts. If the child is no longer a dependent, payments made by the child are deductible by the child and payments made by the parents are deductible by the parents. The eligibility requirements are the same for parents as for students, but if those are met by all, this is a deduction the whole family can love!
Some states also allow this deduction, so to ensure you reap the maximum value for this and other deductions and credits, be sure to consult a tax professional about preparing your return.
Reprinted from the National Association of Enrolled Agents.
About the National Association of Enrolled Agents (NAEA)
NAEA is the professional society that supports its members with resources, education and networking and by representing their interests to government, business and the general public. Find out more about NAEA and becoming an enrolled agent.
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Gail Perry, CPA
Student Loan Interest May Be Tax Deductible
You or your child may be able to get a tax break that helps lower the total cost of a college education. If you meet certain requirements, you can deduct the interest you’ve paid on student loans on your federal tax return. Consult with your tax adviser to see if you qualify. The maximum deductible interest on a qualified student loans is $2,500. This amount is per return, not per person, and varies depending on factors such as filing status and income. Taxpayers may not deduct student-loan interest if they file their returns as married filing separately. Those whose filing status is married filing jointly, single, head of household, or qualifying widow or widower may be able to deduct the interest. Parents who take a loan out in their name for a child's education may deduct the interest if the child was the parent's dependent when the loan was received. If both the parent and the child receive loans to finance the child’s education, the determination of who gets the deduction depends on whether the child was a dependent when the loan was received.