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. Your interest will be reported on the Form 1098-E or a similar document you receive from the lender. If the amount of interest shown on that form is less than $2,500, you can deduct only the actual amount of interest you paid.
Any amount you can deduct, however, will help reduce your taxable income, possibly giving you a smaller tax bill.
You don’t have to itemize to get the student loan interest deduction, but it’s not available to Form 1040EZ filers. Instead, you must file one of the longer returns. The tax break is one of the adjustments to income, also called above-the-line deductions, found right on Form 1040A (line 18) and Form 1040 (line 33).
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 even if you made the student loan interest payments.
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.
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 financially 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.
Also keep in mind that, as with many other tax breaks, the IRS limits the student loan interest deduction if you make more than a certain amount.
The phaseout range amounts are based on your modified adjusted gross income, or MAGI, and are adjusted annually for inflation. For most taxpayers, MAGI is adjusted gross income with certain other tax deductions or income exclusions added back.
On 2014 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 modified adjusted gross income between $65,000 and $80,000. The income phaseout range for married couples filing jointly is $130,000 to $160,000.
Once you make more than the income 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 4 of IRS Publication 970, Tax Benefits for Education.