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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.
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 positon 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 student 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 phase-out 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.
For more details on the deduction for
student loan interest, check out chapter four of IRS
Publication 970, Tax Benefits for Education.
Freelance writer Kay Bell writes Bankrate's tax
stories from her home in Austin,
Texas, and blogs on tax topics at Don't
Mess with Taxes.
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