You can lower your taxable income by remembering to deduct the student loan interest you have paid for the year. Deducting that interest can reduce your taxable income by as much as $2,500. Additionally, it will lower your adjusted gross income (AGI) and possibly make you eligible for even more deductions and credits. Here’s what you need to know:
What Counts as Student Loan Interest?
Student loan interest is the interest you paid on a qualified student loan. There are a few requirements to meet before a loan can be considered a qualified student loan:
- It must be a loan taken out solely to pay qualified education expenses (tuition, fees, room, board, books, supplies, equipment, and other necessary expenses for attending an eligible education institution – a college, university, vocational, or other postsecondary institution eligible to participate in a student aid program administered by the Department of Education).
- The expenses must have been for you, your spouse, or a person who was your dependent when you took out the loan.
- The expenses must have been paid within a reasonable amount of time before or after you took out the loan. This means the expenses must relate to a specific semester or period of study and the loan proceeds were disbursed any time within the three months before the semester began or three months after the semester ended.
- The expenses were for a student who was enrolled at least half-time according to the school’s standard.
- The loan can’t be from your spouse, brothers, sisters, half brothers, half sisters, ancestors, or descendants. It also can’t come from certain corporations, partnerships, trusts, exempt organizations, or a qualified employer plan (like a 401(k) or similar program).
If your loan meets all those criteria, you can deduct any interest you pay as student loan interest up to $2,500 per year. Most standard student loans will meet all of these criteria.
Can You Claim the Deduction?
You can claim the deduction as long as:
- You’re not filing married filing separately.
- No one else is claiming you as their dependent on their tax return.
- You are legally obligated to pay interest on a qualified student loan.
- You actually paid interest on a qualified student loan.
You can even count interest paid by other people on your behalf if you’re the person who’s legally obligated to make the payments. The payments other people make are considered gifts to you, and you are treated as if you are paying the interest.
How Much Can You Deduct?
For the 2009 tax year, the amount of student loan interest you can deduct is generally the smaller of:
- $2,500, or
- The amount of interest you paid in 2009
However, the amount you can deduct is gradually reduced if your AGI before taking the student loan interest deduction is:
- Between $60,000 and $75,000 if you’re filing single, head of household, or qualifying widower, or
- Between $120,000 and $150,000 if you’re filing married filing jointly
If your AGI is over $75,000 or $150,000 (depending on your filing status), then you’re out of luck. No student loan interest deduction for you. To figure out your allowable deduction, you can use this IRS worksheet (at the bottom of the page). (Or you could just use tax prep software…)
Where Do You Claim the Deduction?
To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 32 (Form 1040NR), or line 9 (Form 1040NR-EZ).
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