Table of Contents
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2011.
The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).
This chapter explains:
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What type of loan interest you can deduct,
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Whether you can claim the deduction,
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What expenses you must have paid with the student loan,
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Who is an eligible student,
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How to figure the deduction, and
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How to claim the deduction.
Table 4-1. Student Loan Interest Deduction at a Glance summarizes the features of the student loan interest deduction.
Do not rely on this table alone. Refer to the text for
|
Feature | Description | |
Maximum benefit | You can reduce your income subject to tax by up to $2,500. | |
Loan qualifications | Your student loan: | |
• |
must have been taken out solely to pay qualified education expenses, and | |
• | cannot be from a related person or made under a qualified employer plan. | |
Student qualifications | The student must be: | |
• | you, your spouse, or your dependent, and | |
• | enrolled at least half-time in a degree program. | |
Time limit on deduction | You can deduct interest paid during the remaining period of your student loan. | |
Limit on modified adjusted gross income (MAGI) | $150,000 if married filing a joint return; $75,000 if single, head of household, or qualifying widow(er). |
Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
This is a loan you took out solely to pay qualified education expenses (defined later) that were:
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For you, your spouse, or a person who was your dependent when you took out the loan,
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Paid or incurred within a reasonable period of time before or after you took out the loan, and
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For education provided during an academic period for an eligible student.
Loans from the following sources are not qualified student loans.
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A related person.
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A qualified employer plan.
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Qualifying child, or
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Qualifying relative.
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An individual can be your dependent even if you are the dependent of another taxpayer.
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An individual can be your dependent even if the individual files a joint return with a spouse.
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An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,700 for 2011).
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The expenses relate to a specific academic period, and
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The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period.
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Your spouse,
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Your brothers and sisters,
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Your half brothers and half sisters,
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Your ancestors (parents, grandparents, etc.),
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Your lineal descendants (children, grandchildren, etc.), and
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Certain corporations, partnerships, trusts, and exempt organizations.
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items.
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Tuition and fees.
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Room and board.
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Books, supplies, and equipment.
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Other necessary expenses (such as transportation).
The cost of room and board qualifies only to the extent that it is not more than the greater of:
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The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
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The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items.
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Employer-provided educational assistance. See chapter 11, Employer-Provided Educational Assistance .
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Tax-free distribution of earnings from a Coverdell education savings account (ESA). See Tax-Free Distributions in chapter 7, Coverdell Education Savings Account.
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Tax-free distribution of earnings from a qualified tuition program (QTP). See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program.
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U.S. savings bond interest that you exclude from income because it is used to pay qualified education expenses. See chapter 10, Education Savings Bond Program .
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The tax-free part of scholarships and fellowships. See Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.
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Veterans' educational assistance. See Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.
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Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest.
Example.
In August 2004, Bill took out a student loan for $16,000 to pay the tuition for his senior year of college. The lender charged a 3% loan origination fee ($480) that was withheld from the funds Bill received. Bill began making payments on his student loan in 2011. Because the loan origination fee was not included in his 2011 Form 1098-E, Bill can use any reasonable method to allocate that fee over the term of the loan. Bill's loan is payable in 120 equal monthly payments. He allocates the $480 fee equally over the total number of payments ($480 ÷ 120 months = $4 per month). Bill made 7 payments in 2011, so he paid $28 ($4 × 7) of interest attributable to the loan origination fee. To determine his student loan interest deduction, he will add the $28 to the amount of other interest reported to him on Form 1098-E.
Example.
The payments on Roger's student loan were scheduled to begin in June 2010, 6 months after he graduated from college. He began making payments as required. In September 2011, Roger enrolled in graduate school on a full-time basis. He applied for and was granted deferment of his loan payments while in graduate school. Wanting to pay down his student loan as much as possible, he made loan payments in October and November 2011. Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November.
The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal.
Example.
In August 2010, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2010 through October 2011) and adding it to the outstanding principal balance of the loan. The loan is payable over 60 months, with a payment of $200.51 due on the first of each month, beginning November 2011.
Peg did not receive a Form 1098-E for 2011 from her lender because the amount of interest she paid did not require the lender to issue an information return. However, she did receive an account statement from the lender that showed the following 2011 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest).
Payment Date | Payment | Stated Interest | Principal | |||
November 2011 | $200.51 | $44.27 | $156.24 | |||
December 2011 | $200.51 | $43.62 | $156.89 | |||
Totals | $401.02 | $87.89 | $313.13 |
To determine the amount of interest that could be deducted on the loan for 2011, Peg starts with the total amount of stated interest she paid, $87.89. Next, she allocates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Assuming that Peg qualifies to take the student loan interest deduction, she can deduct $401.02 ($87.89 + $10 + $303.13).
For 2012, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. She also will apply the remaining amount of capitalized interest ($625 − $303.13 = $321.87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes.
You cannot claim a student loan interest deduction for any of the following items.
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Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments.
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Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs.
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Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. For more information, see Student Loan Repayment Assistance in chapter 5, Student Loan Cancellations and Repayment Assistance.
Generally, you can claim the deduction if all of the following requirements are met.
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Your filing status is any filing status except married filing separately.
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No one else is claiming an exemption for you on his or her tax return.
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You are legally obligated to pay interest on a qualified student loan.
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You paid interest on a qualified student loan.
Example 1.
During 2011, Josh paid $600 interest on his qualified student loan. Only he is legally obligated to make the payments. No one claimed an exemption for Josh for 2011. Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2011 Form 1040 or 1040A.
Example 2.
During 2011, Jo paid $1,100 interest on her qualified student loan. Only she is legally obligated to make the payments. Jo's parents claimed an exemption for her on their 2011 tax return. In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2011.
Example 1.
Darla obtained a qualified student loan to attend college. After Darla's graduation from college, she worked as an intern for a nonprofit organization. As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. This payment was treated as additional compensation and reported in box 1 of her Form W-2. Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return.
Example 2.
Ethan obtained a qualified student loan to attend college. After graduating from college, the first monthly payment on his loan was due in December. As a gift, Ethan's mother made this payment for him. No one is claiming a dependency exemption for Ethan on his or her tax return. Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return.
Your student loan interest deduction for 2011 is generally the smaller of:
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$2,500, or
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The interest you paid in 2011.
However, the amount determined above may be gradually reduced (phased out) or eliminated based on your filing status and MAGI as explained below. You can use Worksheet 4-1. Student Loan Interest Deduction Worksheet (at the end of this chapter) to figure both your MAGI and your deduction.
The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($120,000 and $150,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($150,000 or more if you file a joint return).
Table 4-2 shows how the amount of your MAGI can affect your student loan interest deduction.
IF your filing status is... | AND your MAGI is... | THEN your student loan interest deduction is... |
single, head of household, or qualifying widow(er) |
not more than $60,000 | not affected by the phaseout. |
more than $60,000 but less than $75,000 |
reduced because of the phaseout. | |
$75,000 or more | eliminated by the phaseout. | |
married filing joint return | not more than $120,000 | not affected by the phaseout. |
more than $120,000 but less than $150,000 |
reduced because of the phaseout. | |
$150,000 or more | eliminated by the phaseout. |
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Foreign earned income exclusion,
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Foreign housing exclusion,
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Foreign housing deduction,
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Exclusion of income by bona fide residents of American Samoa, and
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Exclusion of income by bona fide residents of Puerto Rico.
Example 1.
During 2011 you paid $800 interest on a qualified student loan. Your 2011 MAGI is $145,000 and you are filing a joint return. You must reduce your deduction by $667, figured as follows.
Your reduced student loan interest deduction is $133 ($800 − $667).
Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR. However, if you are filing Form 2555, Foreign Earned Income, Form 2555-EZ, Foreign Earned Income Exclusion, or Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1. Student Loan Interest Deduction Worksheet at the end of this chapter.
The student loan interest deduction is an adjustment to income. To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 33 (Form 1040NR), or line 9 (Form 1040NR-EZ).
Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. Before using this worksheet, you must complete Form 1040, lines 7 through 32, plus any amount to be entered on the dotted line next to line 36.
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1. | Enter the total interest you paid in 2011 on qualified student loans. Do not enter more than $2,500 |
1. | ||||||
2. | Enter the amount from Form 1040, line 22 | 2. | ||||||
3. | Enter the total of the amounts from Form 1040, lines 23 through 32 |
3. | ||||||
4. | Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 | 4. | ||||||
5. | Add lines 3 and 4 | 5. | ||||||
6. | Subtract line 5 from line 2 | 6. | ||||||
7. | Enter any foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) |
7. | ||||||
8. | Enter any foreign housing deduction (Form 2555, line 50) | 8. | ||||||
9. | Enter the amount of income from Puerto Rico you are excluding | 9. | ||||||
10. | Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) |
10. | ||||||
11. | Add lines 6 through 10. This is your modified adjusted gross income | 11. | ||||||
12. | Enter the amount shown below for your filing status | 12. | ||||||
•Single, head of household, or qualifying widow(er)—$60,000 | ||||||||
•Married filing jointly—$120,000 | ||||||||
13. | Is the amount on line 11 more than the amount on line 12? | |||||||
□ | No. Skip lines 13 and 14, enter -0- on line 15, and go to line 16. | |||||||
□ | Yes. Subtract line 12 from line 11 | 13. | ||||||
14. | Divide line 13 by $15,000 ($30,000 if married filing jointly). Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 |
14. | . | |||||
15. | Multiply line 1 by line 14 | 15. | ||||||
16. | Student loan interest deduction. Subtract line 15 from line 1. Enter the result here and on Form 1040, line 33. Do not include this amount in figuring any other deduction on your return (such as on Schedule A, C, E, etc.) |
16. |
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