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Limited Write-Offs for Student Loan Interest

Sep 14th 2016
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It’s estimated that almost three-quarters of the students in college today use borrowed money to help pay for their college education.

The good news: At least the borrower may be able to deduct part of the interest paid on student loans on his or her federal tax return. Best of all, the write-off is available even if you don’t itemize deductions (i.e., you claim the standard deduction).

The bad news: The student loan interest deduction is phased out for upper-income taxpayers. Thus, if the parents of a student take out the loan, the family may not derive any tax benefit from the interest payments. The IRS says the deduction, if any, belongs to whoever’s name is on the loan.

Start with this basic premise: The annual deduction is limited to the first $2,500 of interest paid for qualified expenses. The list of qualified expenses includes:

  • Tuition and fees
  • Room and board
  • Books, supplies, and equipment
  • Other necessary expenses, such as transportation

But the lender must be an authorized source, like a bank. You can’t deduct any interest paid on an intrafamily loan, like one you get from your rich uncle. And the proceeds must be paid to an accredited educational institution.

The loan can be for the education of yourself, your spouse, or your dependent. Whoever is receiving the money to go to school has to be enrolled at least part time.

According to the IRS, student loan interest may be deductible only if all of the following apply:

  • You paid interest on a qualified student loan in the tax year of the tax return.
  • You are legally obligated to pay interest on a qualified student loan.
  • Your filing status is not married filing separately.
  • Your modified adjusted gross income (MAGI) is less than the specified annual amount.
  • You or your spouse, if filing jointly, cannot be claimed as dependents on someone else’s tax return.

The MAGI limit is indexed annually for inflation (although recent increases have been minimal or nonexistent). For the 2016 tax year, the deduction is phased out for a MAGI between $65,000 and $80,000 for single filers. The phase-out range is between $130,000 and $160,000 of MAGI for joint filers. Once you exceed the upper threshold, no deduction is allowed.

Thus, even taxpayers with relatively moderate incomes for the area in which they reside may be shut out on their tax returns.

For most people, it doesn’t make sense to postpone payment on student loans for income tax purposes, especially if you expect your income to rise in succeeding years. If the deduction is there for the taking now, grab it.

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Rowan Webb
By Rowan Webb
May 29th 2017 16:43 EDT

It seems rather fair to make the deductibles only eligible under the borrower's name. This is to ensure that the deductibles should only be made applicable to those who really do qualify in terms of what they can afford. This way, their financial situation can be better managed and default payments can be prevented. Even though the additional process of filing the deductibles would require time, the amount to be deducted will be worth it.

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