Paying for College: Student Loan Interest Deduction Explained

Interest on student loans can get overwhelming. Luckily, the IRS allows for the Student Loan Interest Deduction which can be taken by qualified filers. The deduction allows for any paid interest to be deducted from amount of income earned annually and provides a valuable tool to help balance finances for those in the throngs of repayment.

Eligibility

Any loan taken out for the sole intention of covering eligible expenses related to the pursuit of a higher eduction is considered a “qualified” student loan with deductible interest. The elegibility of expeneses includes those for which the Tuition and Fees deduction is applicable.

Those attempting to claim the deduction must be indepedent of caregivers and cannot be considered an dependent or exemption on any other tax return. The deduction also carries other conditions and must meet certain criteria related to annual income, a legal obligation to pay interest, and the amount of interest actually paid during the year one is filing.

Interest on student loans can get overwhelming. Luckily, the IRS allows for the Student Loan Interest Deduction which can be taken by qualified filers. The deduction allows for any paid interest to be deducted from amount of income earned annually and provides a valuable tool to help balance finances for those in the throngs of repayment.

Eligibility

Any loan taken out for the sole intention of covering eligible expenses related to the pursuit of a higher eduction is considered a “qualified” student loan with deductible interest. The elegibility of expeneses includes those for which the Tuition and Fees deduction is applicable.

Those attempting to claim the deduction must be indepedent of caregivers and cannot be considered an dependent or exemption on any other tax return. The deduction also carries other conditions and must meet criteria related to annual income, a legally-observed obligation to pay interest, and the amount of interest actually paid during the year in which one files.

Married couples can claim the interest deduction only when filing jointly. The IRS allows one to deduct up to $2,500 annually for any interest paid on student loans which meet federal requirements. Any amount of interest above the threshold of $2,500 doesn’t count, nor can any deduction exceed the actual amount of interest paid.

Interest generated via the various types of educational loans can qualify for the deduction, including: interest on the loan itself, interest on any consolidations, and interest accumulated via lines of credit. The most important qualifier for determining eligible interest involves the intention of money borrowed, any money was used for educational expenses is generally applicable.

Deductions Versus Credits

Tax deductions differ from credits. Credits reduce the total of tax owed whereas deductions reduce the amount of income which can be taxed. The Student Loan Interest Deduction can be taken for up to $2,500 of any interest actually paid in the previous tax year. Deductions lower one’s revenue by the amount of the deduction. Therefore, the actual amount of income tax is lowered along with the tax burden and total bill which one pays.

Forms

Appropriate filing procedures for the Student Loan Interest Deduction are claimed as an adjustment to income, and therefor do not need to be itemized. Filers cannot take such deductions on Form 1040EZ. However, the deduction can be taken on line 18 of Form 1040A or on line 33 of Form 1040, both of which can be submitted via the free IRS efile process.

The cost of college seems never-ending to someone in the doldrums of student loan debt. However, interest paid can often be replenished via a tax return for those who qualify, which helps ease the burden. As with most tax scenarios, understanding the proper filing procedures and following the correct protocol can contribute to a much larger tax reimbursement.

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Katei Cranford is a writer who shares her expertise of financial situations for students and graduates.

How Education Tax Credits Can Beat High Education Costs

Many students are deterred from attending college, because of what they believe are insurmountably high education costs. It is important to know, however, that there are now two federal education tax credits can make the costs of higher education for yourself or your children a lot more affordable.  The names of the credits are the American Opportunity Credit and the Lifetime Learning Credit, and most students qualify for one or the other.

Qualification criteria are as follows: you must be paying your own postsecondary tuition and fees – or the fees that are incurred by your spouse or dependents. Either the parent or a student can claim the credit, but not both at once. In the case of a student who  was claimed as a dependent, it’s the parent who must file for the credit.

Each student is allowed to claim only one of the two available credits in any given tax year. For example, you are not allowed to claim the American Opportunity Credit to pay a portion of your tuition charges, and use the Lifetime Learning Credit to cover the rest of the expenses.

Federal policies do allow for parents to take credit on a per-student, per-year basis; this means that if you are paying tuition for two students in your family, you can claim a credit for each individual who is in school. It is possible that if a family claims two students, one will have the Lifetime Learning Credit while the other uses the American Opportunity Grant.

The American Opportunity Credit can be used to cover up to $2,500 in eligible expenses, per student, with up to forty percent of that refundable, which will decrease tax owed, or increase a family’s refund. The Lifetime Learning Credit, in contrast, is also worth $2,000 but the credit that it offers is limited to the amount of tax you owe, so you will not receive a tax refund.

If you, or someone in your family is considering postsecondary education, be sure to investigate how these two programs may benefit your student.