A good education is a valuable commodity. It can even pay
off for you at tax time if you took out a loan to further your schooling.
In this tax tip • Filing
requirements
• Student
and school qualifications
• Loan
guidelines
• Income
limits
You might be able to deduct up to $2,500 of the interest you
paid on a student loan last year. This deduction will help reduce your taxable
income, possibly giving you a smaller tax bill.
Filing requirements
You don't have to itemize deductions to get this break, but
it's not available to Form 1040EZ filers. You must use either Form 1040A (line
18) or Form 1040 (line 33) to take advantage of this deduction.
The IRS also has a filing status restriction when it comes
to the student loan deduction. If you're married, you cannot file separately
and get this tax break. Married couples must file jointly to claim the student
loan interest deduction.
Regardless of your filing status, if you can be claimed as
an exemption on anyone else's tax return, you're ineligible for this deduction.
Student and school qualifications
The student for whom the loan was taken out must be you,
your spouse or a dependent. A dependent isn't necessarily a relative, but it
must be someone who receives most of his or her support from you.
The IRS also demands that the qualifying student be enrolled
at least half-time in a program that leads to a degree, certificate or other
educational credential.
The school also must be an eligible educational institution.
This is a college, university, vocational school or other post-secondary
establishment that meets student aid program guidelines administered by the
U.S. Department of Education.
Loan guidelines
A couple of years ago, the law was changed so that interest
payments are deductible over the life of the loan, making those long-term
college debts a bit more tax valuable. But there are some other guidelines you
must meet.
You must have taken out the loan solely to pay for
educational expenses. This means you can't tack on schooling costs to a
personal loan and expect the IRS to approve the interest deductibility.
And don't double-dip. If you use home-equity-loan proceeds
to pay for schooling, that interest might be deductible as allowable mortgage
interest, but you cannot also use it to claim the student loan interest
deduction.
The loan, and any interest paid on it, cannot be from a
related person. Neither can you deduct interest you paid on a loan you got from
a qualified plan offered by your employer.
You must use the loan to pay qualified higher education
expenses. These include tuition and fees, room and board, books, supplies,
equipment, and other necessary expenses, such as transportation.
These expenses must have been incurred or paid within what
the IRS calls a "reasonable period of time" before or after you got
the loan. This generally means the costs can be traced to a particular academic
period, such as a semester, trimester or quarter. The IRS also accepts
schooling payments made within 90 days before the start or after the end of
that academic session as reasonable.
One nice option for a finacially struggling student is the
IRS position on help you get making your loan payments. Even if someone else
makes payments on your behalf, if you are the one legally obligated to pay the
principal and interest, you can deduct these third-party interest payments on
your tax return. The IRS considers such situations as if you received the loan
payment money from the third party and then used it to pay your student loan
and interest.
Income limits
Also keep in mind that, as with many other tax breaks, the
IRS limits the
Education
loan interest deduction if you make over a certain amount.
The phase-out range amounts are adjusted annually for
inflation. For 2006 tax returns, the amount of your student loan interest
deduction is gradually reduced if you are a single, head of household, or
qualifying widow or widower filer with adjusted gross income between $50,000
and $65,000. The income phaseout range for married couples filing jointly is
$105,000 to $135,000.
Once you go over the filing range for your status, you
cannot take any deduction for your student-loan interest.
