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Student loan interest deduction rules.

These rules suddenly become interesting when a student loan becomes part of your tax preparation.

The student loan interest deduction lays out specific qualifications.  You may be able to use this deduction on the amount of interest you paid on a qualified student loan in 2015. All of the following must apply:

  • You are legally obligated to pay the interest on the student loan
  • Your modified adjusted gross income (MAGI) is below an annually set specified amount
  • Your filing status is not married, filing separately
  • You or your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return

Who claims the student loan interest deduction?

The first thing to do is find out if another taxpayer is claiming an exemption for you.  If a taxpayer lists your name and other required information on his or her Form 1040 (or Form 1040A) line6c, or form 1040NR, line 7c, you are being claimed as his or her dependent. Generally, that is because you are either a qualifying child or qualifying relative.

Some interesting exceptions to the general rules for dependents for the student loan interest deduction allow that an individual can be your dependent even IF:

  • you are the dependent of another taxpayer
  • the individual files a joint return with a spouse
  • the individual had gross income for the year that was equal to or more than the exemption amount for the year ($4,000 for 2015)

What comprises student loan interest?

This is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments. In addition to simple interest on the loan, if all other requirements are met, student loans interest can include:

  • loan origination fee
  • capitalized interest
  • interest on revolving lines of credit
  • interest on refinanced student loans
  • voluntary interest payments

Student loan interest and interesting facts.

  • You claim this deduction as an adjustment to income, so you do not need to itemize your deductions on your Form 1040 Schedule A.
  • This deduction is subject to a phaseout, which means the amount of the deduction gradually decreases and phases out completely if and when your modified adjusted gross income (MAGI) amount reaches the annual limit.
  • No double dipping. You can’t deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest).

Remember!

  • Look for Form 1098E Student Loan Interest Statement. You’ll need it.
  • If you want to include interest on revolving lines of credit, use the credit card ONLY for qualifying purchases. Even one non-qualifying purchase will cause the interest to be non-deductible.

Interested in interest?

Tax preparation isn’t simple, and there can be far-reaching consequences to each decision you make regarding your immediate and ongoing tax preparation. Let’s talk about this. Call, click or come in.

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