IRS Rules For Claiming Student Loan Interest Deduction
One of the benefits of a higher education is that the cost of it can be offset with a array of tax write offs and credits that you can take advantage of simply by filling out your federal income tax return as you would normally do each year.
The Student Loan Interest Deduction permits a taxpayer to deduct interest actually paid (not accumulated) on a student loan of theirs, or of a qualifying dependent during the past calendar year, provided certain conditions are met. Any kind of bank fees taken out of the loan proceeds as a condition of the the loan, such as loan origination fees, might also be eligible for deduction over the life of the loan.
Some types of loans will not qualify for the IRS Student Loan Interest Deduction. They would include loans made against retirement accounts (401k) and private borrowings made between relatives and family members. One prevalent misconception concerning the Student Loan Interest Deduction is that a parent can claim the deduction for themselves if they are helping to make the student's payments. The reality is that a parent can only use the deduction if they personally sign for the loan. This means that in every case loans granted to borrowers with special financial needs such as Stafford, Perkins, and PLUS Graduate loans cannot be deductible to the parents because the school itself is the lender, and the student is always the borrower.
Commonly, you have to itemize your deductions when you want to write them off on your income tax returns, but student loan interest is one exception. The student loan interest deduction is an offset to your taxable income, and what this does is reduce your gross adjusted income subject to tax. You can take this deduction even if you do not itemize. For most tax payers this is beneficial because it allows them to also take advantage of the standard deduction which is several thousand dollars more.
Claiming student loan interest deductions is done "above the line" by way of adjustments to income, and when you are filling out your 1040 or 1040A form you should look for line 33 of that section of the form known as Adjustments To Income.
Tax filers who earn less than $60.000 per year ($120,000 if married and filing jointly with a spouse) can claim as a student loan interest deduction up to $2.500.00. You will not be able to claim this deduction if you are listed as a dependent on some other taxpayer's return.
First, be sure that you can qualify
A qualified student loan is a debt used only to cover the costs of qualified higher education expenses. Not everyone who has a qualified student loan qualifies. Your eligibility for this deduction is going to depend upon when you begin to repay your loans. Will it be within in the next five years, or are your student loans being used for a degree program? One easy way to establish your eligibility, and accurately calculate your student loan interest deduction is to try to file an electronic tax return. The system you use will ask you to input some information into their online database, and then give you a step-by-step method on how to proceed.
To qualify for this deduction your student loans should only be used for costs directly connected to your education as provided by your school. This should be an accredited college or university, a vocational school, or some alternative post secondary school that is eligible according to the IRS.
The Student Loan Interest Deduction can be taken in the same year as you apply for certain scholarships and Lifetime Learning Tax Credits made available to you, but there is a “double dipping” rule that applies however, and it disallows the deduction more than once if it would on it own also qualify as a tax credit.
Figuring Your Deduction
To get started, you will need to locate form 1098-E in your papers. This is a statement that your bank sends to you each year. The amount of interest that you paid during that tax year will be reported to you and the IRS in box one of that form. Your bank may ask you for a completed Form number W-9S, which is a request for the student/taxpayer's Tax Identification Number (Social Security number), and Certification before they send you your 1098-E form.
Inside the instruction booklet accompanying your 1040 or 1040A form from the IRS you will find the Student Loan Interest Deduction worksheets which will help you determine the true value of your deduction by showing you how the IRS applies the "phase out rule" when calculating the amount of the deduction. Just follow the instructions found on the worksheets.
Pursuant to IRS Publication 970: "Tax Benefits For Education", the responsibility to figure out and claim the correct amount of the deduction is on the taxpayer. To avoid mistakes it is advisable to go through the entire publication and try to understand completely how the IRS applies the phase out rule. Also, Publication 970 contains handy references to such matters as how to deal with scholarships, fellowships, veterans benefits, Pell Grants, Fulbright Grants, and other need-based education grants.
Changes in status
If you choose to refinance an eligible student loan for more than the original principal amount, and you use the remaining proceeds for anything other than IRS qualified education expenses, then you probably will not be able to deduct any of the interest paid on the new refinanced loan, so be very careful in your planning.
Planning ahead for the future
The deduction for student loan interest will continue to be available to every person who is obligated to pay back a student loan through the year 2012. Beginning with the very next tax year, this deduction and calculation method will be subject to revision based on older IRS codes where the loan interest was deductible only for the first five years of the life of the loan.
One of the benefits of a higher education is that the cost of it can be offset with a array of tax write offs and credits that you can take advantage of simply by filling out your federal income tax return as you would normally do each year.
The Student Loan Interest Deduction permits a taxpayer to deduct interest actually paid (not accumulated) on a student loan of theirs, or of a qualifying dependent during the past calendar year, provided certain conditions are met. Any kind of bank fees taken out of the loan proceeds as a condition of the the loan, such as loan origination fees, might also be eligible for deduction over the life of the loan.
Some types of loans will not qualify for the IRS Student Loan Interest Deduction. They would include loans made against retirement accounts (401k) and private borrowings made between relatives and family members. One prevalent misconception concerning the Student Loan Interest Deduction is that a parent can claim the deduction for themselves if they are helping to make the student's payments. The reality is that a parent can only use the deduction if they personally sign for the loan. This means that in every case loans granted to borrowers with special financial needs such as Stafford, Perkins, and PLUS Graduate loans cannot be deductible to the parents because the school itself is the lender, and the student is always the borrower. Commonly, you have to itemize your deductions when you want to write them off on your income tax returns, but student loan interest is one exception. The student loan interest deduction is an offset to your taxable income, and what this does is reduce your gross adjusted income subject to tax. You can take this deduction even if you do not itemize. For most tax payers this is beneficial because it allows them to also take advantage of the standard deduction which is several thousand dollars more.
Claiming student loan interest deductions is done "above the line" by way of adjustments to income, and when you are filling out your 1040 or 1040A form you should look for line 33 of that section of the form known as Adjustments To Income.
Tax filers who earn less than $60.000 per year ($120,000 if married and filing jointly with a spouse) can claim as a student loan interest deduction up to $2.500.00. You will not be able to claim this deduction if you are listed as a dependent on some other taxpayer's return.
First, be sure that you can qualify
A qualified student loan is a debt used only to cover the costs of qualified higher education expenses. Not everyone who has a qualified student loan qualifies. Your eligibility for this deduction is going to depend upon when you begin to repay your loans. Will it be within in the next five years, or are your student loans being used for a degree program? One easy way to establish your eligibility, and accurately calculate your student loan interest deduction is to try to file an electronic tax return. The system you use will ask you to input some information into their online database, and then give you a step-by-step method on how to proceed.
To qualify for this deduction your student loans should only be used for costs directly connected to your education as provided by your school. This should be an accredited college or university, a vocational school, or some alternative post secondary school that is eligible according to the IRS.
The Student Loan Interest Deduction can be taken in the same year as you apply for certain scholarships and Lifetime Learning Tax Credits made available to you, but there is a “double dipping” rule that applies however, and it disallows the deduction more than once if it would on it own also qualify as a tax credit.
Figuring Your Deduction
To get started, you will need to locate form 1098-E in your papers. This is a statement that your bank sends to you each year. The amount of interest that you paid during that tax year will be reported to you and the IRS in box one of that form. Your bank may ask you for a completed Form number W-9S, which is a request for the student/taxpayer's Tax Identification Number (Social Security number), and Certification before they send you your 1098-E form.
Inside the instruction booklet accompanying your 1040 or 1040A form from the IRS you will find the Student Loan Interest Deduction worksheets which will help you determine the true value of your deduction by showing you how the IRS applies the "phase out rule" when calculating the amount of the deduction. Just follow the instructions found on the worksheets.
Pursuant to IRS Publication 970: "Tax Benefits For Education", the responsibility to figure out and claim the correct amount of the deduction is on the taxpayer. To avoid mistakes it is advisable to go through the entire publication and try to understand completely how the IRS applies the phase out rule. Also, Publication 970 contains handy references to such matters as how to deal with scholarships, fellowships, veterans benefits, Pell Grants, Fulbright Grants, and other need-based education grants.
Changes in status
If you choose to refinance an eligible student loan for more than the original principal amount, and you use the remaining proceeds for anything other than IRS qualified education expenses, then you probably will not be able to deduct any of the interest paid on the new refinanced loan, so be very careful in your planning.
Planning ahead for the future
The deduction for student loan interest will continue to be available to every person who is obligated to pay back a student loan through the year 2012. Beginning with the very next tax year, this deduction and calculation method will be subject to revision based on older IRS codes where the loan interest was deductible only for the first five years of the life of the loan.
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