The student loan interest deduction could result in fewer taxes, but you have to meet the requirements
All of you beleaguered underemployed college grads will be relieved to know that you can deduct student loan interest on your taxes.
But, in order to do so, you must qualify according to all the rules and regulations laid down by the IRS.
Who can take the deduction
You can only deduct student loan interest if
- you paid interest on a qualified student loan during the tax year
- you are legally obligated to pay interest on a qualified student loan
- your filing status is not married filing separately
- you and your spouse, if married filing jointly, cannot be claimed as dependents on someone else’s return
- your modified AGI (adjusted gross income) is less than the limits set every year (see below)
A qualified student loan is one that you took out solely to pay for qualified higher education expenses, which include tuition, room and board, books, and fees.
There are also income limitations that prevent upper-income taxpayers from taking advantage of the deduction:
- Those with incomes less than $55,000 ($110,000 if married filing jointly) can deduct up to $2,500.
- For incomes between $55,000 and $70,000 ($110,000-$140,000 for married filing jointly) the deduction will be phased out.
- Those with incomes over $70,000 ($140,000 if married filing jointly) cannot take the deduction at all.
You can deduct interest on student loans you took out for yourself, your spouse (if you file jointly), or your dependents. That means parents can take the deduction. But be aware: parents can only take the deduction if they themselves are liable for the loan. If you are just helping your child out with their payments, you cannot take the deduction.
How to take the deduction
You will be glad to know that the student loan interest deduction is an above-the-line deduction, which means that you can take it without itemizing deductions and without completing a Schedule A.
The easiest way to calculate the deduction is to use online tax preparation software, but if you are preparing your own return, you can take the deduction in the Adjusted Gross Income section of your 1040. Worksheet 4-1 in IRS Publication 970 can help you work out the exact amount you can deduct.
If you paid more than $600 in interest you should receive a Form 1098-E [Student Loan Interest Statement] from your lender. You will need the information in box 1 to determine the size of your deduction.
Unfortunately, you can only deduct a limited amount: $2,500 or whatever you actually paid, whichever is less.
These rules for the student loan interest deduction are good through the 2012 tax year. But starting with the 2013 tax year (unless Congress changes the law) the deduction will revert back to old rules than only allowed you to deduct student loan interest for the first sixty months of repayment.
So filing your 2012 taxes might be your last chance to claim this deduction.
Photo via DonkeyHotey on Flickr.