Because of the high price of college, many people have to take out loans to pay the tuition and other associated costs. However, you may be able to use some of these costs to reduce your tax liability when you file your income taxes by claiming the student loan interest deduction.
Student Loans Defined
Student loans are narrowly defined by the Internal Revenue Service to prevent people from abusing the deduction. In order to qualify as a student loan, you must have borrowed the money to pay for qualified education expenses for yourself, your spouse or someone who you claimed as a dependent at the time you took out the loan. Qualified educational costs include tuition, room and board, books and transportation cost to get to and from school.
Deduction Eligibility
Even if you have a qualifying student loan, not all taxpayers can deduct their student loan interest. First, you are prevented from deducting student loan interest if you use the filing status married filing separately. Second, you are prevented from deducting your student loan interest if your income exceeds the yearly limit. This limit varies depending on whether you file a single or joint tax return, and can be adjusted by the IRS for inflation. You will find the income limits listed in IRS Publication 970 - Student Loan Interest Deduction.
Interest Only
The IRS only allows you to deduct the interest that you paid on your student loans, rather than the total amount of the loan payment. Though you can keep track of your payments during the year to figure the interest, your student loan lender will send you a Form 1098-E that shows the total interest paid during the year. This is the amount you can deduct from your taxable income. If you do not receive your Form 1098-E by the end of January of the following year, contact your lender.
Reporting
If you plan to claim your student loan interest on your taxes, file your return with either Form 1040 or Form 1040A. Since the deduction is not an itemized deduction, you do not have to use Schedule A. If you use Form 1040, the student loan interest deduction goes on line 33. If you use Form 1040A, the student loan interest deduction goes on line 18. The value of the deduction will vary depending on your tax rate. The higher your tax rate, the greater your tax savings.
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