When you start repaying a student loan, you cannot claim a deduction for your entire payment; however, you can deduct the portion that covers your interest charges. Knowing what interest you can deduct and how to report it on your income taxes can reduce the amount of tax you pay at the end of the year.
Student loan interest deduction requirements
In order to claim your student loan interest as a tax deduction, you must satisfy several requirements. Married persons who file separately cannot claim a deduction for student loan interest. Also, neither you, nor your spouse if applicable, can be claimed as a dependent on another person’s tax return. Finally, the deduction is only available if your modified adjusted gross income is below the annual limit. In 2010 for example, your modified adjusted gross income must be less than $75,000 for a single filer, or less than $150,000 when filing a joint return.
Annual deduction limitations
You can deduct only the student loan interest you pay during the tax year, subject to annual limitations. If you pay at least $600 of interest, you will receive a form 1098-E that reports your total payments. If you pay less than $600, you can still claim the deduction, but you will have to consult your records or contact your lender to find out exactly how much interest you paid. Although the annual deduction limit is subject to change, in 2010 you can deduct up to $2,500 of student loan interest payments.
Eligible student loans
You can only claim the deduction for interest that accrues on student loan funds that you actually use to pay education-related expenses. For example, if during your senior year in college you use $2,000 of your student loan to purchase suits for your new job, the interest that accrues on that $2,000 is never deductible. Additionally, the loan cannot be from a relative or a qualified employer plan. Though you must be the one who is responsible for repaying the loan, you can use the funds to pay the school expenses of your spouse or dependents and still be able to claim the deduction.
Reporting the deduction
To claim the income tax deduction, you cannot file your income taxes on Form 1040EZ. Since the deduction is an adjustment to income, you don’t have to itemize your deductions to claim it. Unlike many other deductions, there are no additional IRS forms to prepare; however, the IRS instructions include a worksheet to help you calculate the right amount.