Tax Breaks for Student Loans
Good news! The interest you pay on your student loan might let you pay less on your taxes. Thanks to the Taxpayer Relief Act of 1997, tax time will be a little better for you and other student borrowers.
How It Works
Depending on your specific loan situation, you may be eligible to deduct some of the interest you pay on student loans from your reported income. That means a lower income bracket – and less tax.
The amount you can deduct depends upon your income level. Right now, the maximum deduction is $4,000.
To claim this deduction, you must use either Form 1040 or Form 1040A. Follow the instructions included with the form to determine the amount you can deduct. Include that amount on line 24 of Form 1040 or line 17 of the Form 1040A.
Who Is Eligible
Both students and parents who have taken out loans on behalf of their kids may be eligible for this deduction.
You can deduct interest on your student loans if you:
- have taken out the loan to pay for your own expenses or the expenses of a spouse or dependent;
- have used the loan for qualified educational expenses;
- are enrolled at least half time in a degree program at an eligible institution; and
- are not claimed as a dependant by your parents on their tax returns.
You also must meet an income test. The income limits are dependent on your marital status and your adjusted gross income (AGI).
Your AGI is your total income minus deductions for a number of items, like moving expenses or medical savings accounts. The IRS includes an income-test worksheet in the instructions that come with the 1040 tax forms.
Once you’ve determined your AGI, you’ll know if you’re eligible for a tax break. If you are a single taxpayer and report an AGI of less than $80,000, you’re eligible. Married taxpayers are eligible if they report a modified AGI of less than $160,000.
Qualified Educational Expenses
To take this deduction, you must have used your loan only for certain kinds of expenses that contribute to your education. The expenses that qualify include tuition, fees, room and board, books, supplies and other related expenses. These expenses must come from your enrollment in a degree, certificate or similar program at an eligible institution. Eligible institutions include most colleges, universities graduate schools and vocational schools.
Eligible loans include the Federal Stafford and the Federal PLUS loans, other federal education loans, personal loans issued by banks and other financial institutions and home equity loans. You can’t use the loan money for purposes other than qualified educational expenses.
You may only deduct interest that was paid during the tax year, as long as the payments were due and made during the first 60 months of repayment.
Keep in mind that if you’re planning to take this deduction, you should save any receipts and bills for your educational costs. If you’re audited you’ll need them in order to document to expenditures.
More Information
For more details on the tax break on student loans, visit the IRS Web site at http://www.irs.gov/. Check out:
- “Publication 970, Tax Benefits for Higher Education” http://www.irs.gov/pub/irs-pdf/p970.pdf
- Student Loan Interest Deduction
http://www.irs.gov/ – Go to “Help”, click on “FAQs” (on the left), scroll down near the bottom of the page and click on “Student Loan Interest Deduction”
You can also call the IRS to ask questions or request forms and publications. The toll free number for tax questions is 1-800-829-1040. The toll-free number for requesting forms is 1-800-829-3676.
Look into the IRS tax breaks and see if you’re eligible. You just might look forward to filing your taxes this year!
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