MONEY MANAGEMENT

From the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®

GET EDUCATED ON THE STUDENT LOAN INTEREST DEDUCTION

(January 21, 2005) — Many students and their parents find it necessary to take out student loans to help pay for the escalating costs of a college education. If you’re among them, you may be eligible for a full or partial deduction of up to $2,500 in interest paid on these loans, reports the Virginia Society of CPAs. The amount you may deduct depends on a number of factors, including your modified adjusted gross income (MAGI).

No need to itemize

The student loan interest deduction is claimed as an adjustment to gross income, which means you don’t have to itemize to take the deduction. The deduction helps to reduce your taxable income, which in turn lowers your tax bill. Married taxpayers must file jointly to take the student loan interest deduction. If you can be claimed as a dependent on someone else’s tax return, you’re ineligible for this tax break.

Deduct tuition, fees and more

To qualify for the deduction, the loan proceeds must be used to pay for your own qualifying higher education expenses or the expenses of a spouse or dependent. Qualified expenses include tuition and fees, room and board, books, supplies, equipment and other necessary expenses, such as transportation. The total must be reduced by any Veteran’s Administration or employer-provided educational benefits received by the student and also by any nontaxable distributions from a Coverdell Education Savings Account.

Most loans qualify

Eligible loans include Federal Stafford and Federal PLUS loans, as well as personal loans issued by banks and other financial institutions. Be aware, however, that you cannot deduct the interest you pay on home equity loan interest as both mortgage interest and student loan interest. The loans must be used to pay for education at a qualified institution. These include any college, university, vocational school or other post-secondary educational institution eligible to participate in student aid programs administered by the U.S. Department of Education.

Income may limit deduction

The IRS limits the student loan interest deduction for taxpayers whose MAGI exceeds certain amounts. For 2004 returns, the amount is gradually reduced if you are single, head of household or qualifying widow or widower filer with MAGI between $50,000 and $65,000. The income phase-out range for married couples filing jointly is $100,000 to $130,000. Once your MAGI goes over the range for your filing status, you cannot take any deduction for your student loan interest.

How to claim the deduction

You claim the student loan deduction when you file your income tax return. You may use Form 1040 or Form 1040A, each of which has special lines for claiming the deduction. Lenders and loan services are generally required to report to both you and the IRS if you paid at least $600 in student loan interest during the tax year. By the end of January, you should have received Form 1098-E, showing how much interest you paid. If you have not, contact your lender.

When the student is no longer your dependent

Many people incorrectly think that once the child is no longer a dependent, student loan interest is no longer deductible. Not true, says the Virginia Society of CPAs. Suppose you took out a loan to pay for your son’s qualified education. He was your dependent at the time you took out the loan, but has since graduated, is employed and is no longer your dependent. You can still deduct the interest that you pay (assuming that you otherwise qualify to do so) since your son was your dependent when you took out the loan. If you have any questions about this or other matters concerning the student loan interest deduction, contact a CPA.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.

 

Lifetime Financial Planning, Inc.

Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional

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