Taxes From A To Z (2014): S Is For Student Loans

Apr 2 2014, 5:10pm CDT | by

Taxes From A To Z (2014): S Is For Student Loans
Photo Credit: Forbes Business

S is for Student Loans.

Americans owe a lot of money in student loans. A lot. Recent statistics indicate that roughly 37 million students collectively owe more than $1 trillion in student debt. The average four-year graduate owes between $26,000 to $29,000 in loans; those with graduate loans can owe significantly more.

Fortunately, there is a deduction for taxpayers who are still paying interest on a student loan used for higher education. And even better, the student loan interest deduction is available even if you don’t itemize. It’s technically considered an adjustment to income or an “above the line” deduction since you reduce your taxable income on the front page of your return without regard to any deductions claimed on a Schedule A.

Your student loan interest deduction for 2013 is generally the smaller of the interest you paid in 2013 or $2,500. However, phaseouts do apply beginning at a modified adjusted gross income (MAGI) of $60,000 for individual taxpayers ($125,000 for married taxpayers filing jointly). You’re completely phased out for a MAGI over $75,000 for individual taxpayers ($155,000 for married taxpayers filing jointly). You may not deduct your student loan interest if you file as married filing separately or if someone else claims an exemption for you on his or her tax return.

To qualify, interest on student loans must be for student loans taken out to pay qualified education expenses. This includes tuition and fees; books, supplies, and equipment; and other necessary expenses such as transportation. Room and board may also be included if the cost is not more than the allowance for room and board included in the cost of attendance at your school for federal financial aid purposes or the actual amount charged if you live in housing owned or operated by your school.

The loan does not have to come from an institutional student loan provider. You can include other debt, such as credit cards and line of credit IF you use it only to pay student debt (don’t commingle your debt). Bank and other loans also qualify but the borrowed funds cannot be from a related person or made under a qualified employer plan.

For purposes of the deduction, you can claim loans taken out for qualified expenses for you, your spouse, or your dependent; the student must have been enrolled at least half-time in a degree program when the loan was made.

As with other education tax breaks, you must reduce your qualified education expenses by the total amount paid for employer-provided educational assistance; tax-free distribution of earnings from a Coverdell education savings account or a qualified tuition program (QTP); U.S. savings bond interest previously excluded from income; tax free scholarships, fellowships and grants; and veteran’s benefits.

Finally – and this is a biggie that students often miss – if someone else makes a payment on your behalf, you are treated as though you made the payment. Yes, you read that correctly. If, for example, your mom and dad pay some of your loans, you can still claim the interest for purposes of the deduction (but be careful and read the criteria above: if your parent claims you as a dependent but you are legally obligated to pay the loan, then neither one of you can take the deduction).

For more in the series, see:

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