Taking out loans to pay for your education is the only option to afford college for some students. This can get expensive quickly, depending on your interest rate. However, any interest you pay on certain student loans may be deductible when you file your tax return. You are able to deduct up to $2,500 in interest, or the actual amount you paid, depending on which amount is less. Student loan interest deduction is dependent upon your modified adjusted gross income, and can be reduced if you exceed the limit annually. You don’t need to itemize to take this deduction, since it makes an adjustment to your income.
There are five requirements which must be met in order to deduct student loan interest:
- You paid the interest on a student loan that is qualified for deduction within the tax year
- You are required to pay the interest
- Your filing status is not married, filing separately
- Your modified adjusted gross income is less than the annual threshold
- You (or your spouse if filing jointly) are not claimed as a dependent on another’s return
Normally, qualified loans are those which are used to pay for higher education. Be sure to check which expenses meet the rules for qualification.
Your student loan lender will supply you with a Form 1098-E, Student Loan Interest Statement, for interest payments in excess of $600. You claim the deduction as an adjustment to income on your Form 1040. Certain restrictions apply to students who file foreign tax returns or different tax forms.