Student loans can bring you tax relief. If you and your loan qualify, you can write off up to $2,500 of the interest you pay each year. You don't have to itemize deductions to benefit. Your income, your choice of school, the way you file your return and how you use the loan shape whether you can use this above-the-line deduction.
Dependency and Filing Status
You must be a student or claim a student as a dependent on federal income tax returns in order to take advantage of this deduction. You don't qualify for the break if someone else, such as a parent or relative, claims you as a dependent. Also, if you're married, you must file jointly rather than separately to write off interest.
Eligible Higher Education
You or your dependent may attend any university, vocational school, community college or junior college that participates in the federal government's student aid program. It normally doesn't matter whether the university is public, private or for-profit. According to the Internal Revenue Service, most schools beyond high school qualify. The IRS suggests you contact your school to verify that it participates in the federal program. The student must pursue a degree and be enrolled as at least a half-time student.
Your loan must be used exclusively to meet the expenses necessary to attend the school. You can even open a credit card and deduct the interest if you use it solely for educational expenses. Tuition, required fees, room and board, books and equipment qualify as educational expenses. You may include the cost of a laptop or tablet required by the school to attend or pursue a particular degree. As to room and board, you're allowed to count the greater of what the school considers to be the cost of attendance, or what you actually spend for campus or other school-owned or run housing.
So long as the loan is exclusively for your education, the lender normally doesn't matter. Your loan doesn't have to be federally subsidized. Putting your college expenses on a credit card will qualify. However, the IRS does not permit deductions if your spouse, parents or relatives loaned you money.
Interest That Counts
Deductible interest includes more than just simple interest on the principal balance. You may count the loan origination fee charged for using the borrowed money, but not for processing or loan commitment fees. The IRS will allow you to write-off unpaid interest tacked onto the principal balance, so long as you made a loan payment in the tax year. Your interest is reported on IRS Form 1098-E.
Legally Obligated to Repay
You may not deduct interest on a loan you don't legally have to repay. So long as you're obligated to repay and no one else claims you as a dependent, you can claim interest paid by someone on your behalf; the IRS says that it treats these payments as being made by you. Interest you pay while your obligation is deferred is deductible since the obligation is only delayed, not eliminated.
If your adjusted gross income, not counting student loan interest or the tuition and fee deductions, is $80,000 or more ($160,000 if married filing jointly) as of 2014, you can't claim student loan interest. To figure whether you've reached this threshold, subtract the total of the income adjustments you report on lines 23 to 32 from the income figure reported on line 22 of Form 1040. For Form 1040A filers, subtract the sum of lines 16 and 17 from income reported on line 15.
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.