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The Student Loan Interest Tax Deduction for Students and Parents

Rules for Claiming the Student Loan Interest Deduction

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Note: Click here for updated information for 2010.

Overview of the Student Loan Interest Deduction:

The Student Loan Interest Deduction allows an individual to deduct any interest actually paid (not just accumulated) on a student loan during the calendar year, as long as certain conditions are met.

The maximum deduction is $2,500 for 2009, and is subject to income limitations.

This deduction is actually an “above the line” adjustment, which means you do not need to itemize your other deductions to get it. In other words, you can take the standard deduction and still deduct your student loan interest.

Eligible Interest:

The actual deduction requires the use of a more complex formula, but the basic premise is simple. In essence, you can only deduct the portion of each loan payment that represents interest.

Any fees that have to be paid up front to receive the loan, such as origination fees, may also be deducted over the life of the loan.

Certain types of loans do not qualify for the Student Loan Interest Deduction. These would include a loan taken from a qualified plan (401k, 403b, 457, etc.) and loans made between related parties (grandparent to student, etc.).

Further, the money received for the loan must be used only for tuition, room, board, books, or fees.

Restrictions:

All of the following must be true of the loan for the interest to be considered deductible:

  • Your filing status in not Married Filing Separately.
  • No one else can claim you as an exemption on his or her tax return.
  • You are legally obligated to pay the interest on the student loan.
  • You actually paid the interest. Accumulation of interest on your balance by itself is not deductible.

One of the most common misunderstandings about the Student Loan Interest Deduction is that a parent can claim it for helping make payments on their child’s loan. In fact, a parent can only take the deduction if they are personally liable for that loan. This means that Stafford, Perkins, and PLUS Graduate loans will not be deductible to a parent since the student is the borrower.

Income Phase-Outs:

The Student Loan Interest Deduction is reduced (or “phased-out”) for taxpayers with certain levels of Modified Adjusted Gross Income (MAGI).

For taxpayers claiming Single, Head of Household, or Widow(er) status:

  • $59,999 (MAGI) or less– The full deduction is permitted.
  • $60,000 – 74,999 (MAGI) – A partial deduction is permitted.
  • $75,000 (MAGI) or more– No deduction is permitted.

For taxpayers claiming Married Filing Jointly status:

  • $119,999 (MAGI) or less– The full deduction is permitted.
  • $120,000 - $149,999 (MAGI) – A partial deduction is permitted.
  • $150,000 or more – No deduction is allowed.

Coordination with Other Tax Benefits:

The Student Loan Interest Deduction can be taken in the same year as the Hope Scholarship and Lifetime Learning Tax Credits. There is a “double dipping” rule however, that prohibits deducting the interest twice if it qualifies for a separate type of deduction.

For example:
You could not deduct interest on a home-equity line of credit used to pay for college as both a Student Loan Interest Deduction and also a Mortgage Interest Deduction.

For More Information:

Be sure to review IRS Publication 970 and talk to your tax professional before you make any decisions about your unique situation.

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