Fiscal Tax Blog

Student loan interest can be deducted from taxable income on the Federal tax return. Student loan interest is the interest paid during the tax year on any loan taken out to pay for higher education expenses. To qualify for the deduction, the expenses must have been paid for the taxpayer or a dependent who was enrolled in an eligible education institution at least half time. The education expenses themselves can be deducted separately – this deduction is for the interest paid on loans taken to pay the expenses.

Any loan taken out to pay higher education expenses qualifies, as long as it was not obtained from a relative. Most loans that are taken out specifically for college expenses will send the taxpayer a form 1098-E, Student Loan Interest Statement, after the end of the tax year. The amount of student loan interest is shown in Box 1 of this statement. To find the amount of the deduction, the taxpayer should add the amounts from Box 1 of all of the 1098-E statements received, and add any student loan interest paid but not shown on a 1098-E.

For example, if a taxpayer took out a loan to pay for the college expenses of a dependent, the interest paid on that loan is deductible. If that taxpayer also paid interest on a student loan for another dependent enrolled at another college, that interest is also deductible. The taxpayer would add together the total of all of the interest paid on all of the student loans to determine the amount of the deduction.

This deduction is subject to the following rules: A taxpayer may not take this deduction if married filing separately. The taxpayer's Adjusted Gross Income must be below $70,000 if single, head of household, or qualifying widower, or below $145,000 if married filing jointly. A Student Loan Interest Deduction worksheet is provided in the instructions of the 1040 and the 1040A to calculate both the Adjusted Gross Income and the amount of the deduction. The maximum amount of the deduction is $2,500.

Consult a tax professional for special situations or circumstances.

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