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Tax Deduction For Student Loan Interest: An Overview

26 U.S.C. §221 allows a tax deduction equal to the amount of interest you paid during the tax year on qualified student loan repayments up to a maximum of $2,500.00. It is one of several tax breaks that Congress has provided to help offset the costs of higher education.

To be deductible, the indebtedness must be a "qualified education loan" as defined in 26 U.S.C. §221(d)(1), incurred by the taxpayer solely to pay qualified higher education expenses:

  • "(A) which are incurred on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred",
  • "(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and"
  • "(C) which are attributable to education furnished during a period during which the recipient was an eligible student (at least half-time and enrolled in a program leading to a degree, certificate or other educational credential)."

A qualified education loan DOES NOT include money loaned to you by a relative (e.g. spouse, siblings, ancestors, descendants, and certain corporations or organizations that you have a significant interest in) or money loaned to you by a qualified employer plan. Additionally, you must be legally obligated to make interest payments on the loan to take the deduction.

The qualified education loan must be used at an "eligible educational institution", which is very broad and includes any accredited public, non-profit or privately owned for-profit college, university, vocational school or other post-secondary educational institution. The institution must be eligible to participate in a student aid program administered by the U.S. Department of Education.

The qualified education loan must have been used to pay "qualified education expenses" as defined in 26 U.S.C. §221(d)(2), which include:

  • Tuition and fees
  • Room and board, to the extent it does not exceed:
  1. The amount for room and board, as determine by the eligible education institution, that was included in the cost of attendance for a particular academic period; or
  2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution
  • Books, supplies and equipment
  • Other necessary expenses such as transportation fees

However, the student loan deduction EXCLUDES any amount of qualified education expenses that were paid by the following:

  • Employer-provided educational assistance
  • Tax-free distributions of earnings from a Coverdell ESA.
  • Tax-free distributions of earnings from a qualified tuition program.
  • U.S. savings bond interest excluded from income because it was used to pay qualified education expenses
  • Tax-free portions of scholarships and fellowships
  • Veteran's educational assistance
  • Any other tax-free payments received as educational assistance other than gifts and inheritances.

You may deduct the amount of student loan interest you paid during the tax year not exceeding $2,500.00 subject to the following limits:

  • If your modified adjusted gross income does not exceed $65,000 ($135,000 if filing jointly) in 2018, then the taxpayer can deduct the full amount of interest paid up to $2,500.00.
  • If your modified adjusted gross income is greater than $65,000 ($135,000 if filing jointly) but less than $80,000 ($165,000 if filing jointly) in 2018, then the amount of the student loan interest deduction is gradually phased out.
  • If your modified adjusted gross income is greater than $80,000 ($165,000 if filing jointly) in 2018, then the student loan interest deduction CANNOT BE CLAIMED.

The student loan interest deduction is subject to the following additional rules:

  • No double-dipping for the student loan interest deduction against any amount for which another deduction was allowed for under the Internal Revenue Code. 26 U.S.C. §221(e)(1).
  • Married couples MUST file a joint tax return to claim the student loan interest deduction. Taxpayers who are married filing separately are prohibited from claiming this tax benefit. 26 U.S.C. §221(e)(2).

The student loan interest deduction is an adjustment to income that can be claimed on Form 1040, Form 1040A or Form 1040NR. Your lender should send you Form 1098-E (Student Loan Interest Statement) showing the amount of interest you paid during the tax year to aid you in claiming the deduction. If you discovered that you missed out on this benefit on a previous tax year, then you may be able to file an amended return and claim a greater refund. The Internal Revenue Service will accept an amended return up to three years from the date that the original return was filed or two years from the date you paid the tax, whichever is later. If you have any questions about the student loan interest deduction or any other aspect of federal taxation, do not hesitate to contact the attorneys at Kershaw, Vititoe & Jedinak PLC.

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