A Guide to Tax Deductions for Student Loan Interest Payments

Student loan interest is a tax deduction for a number of borrowers. This rule is similar to one that allows you to deduct mortgage interest in a given tax year. The deduction is designed to encourage more students to go to to college, just like the mortgage deduction is designed to encourage home ownership. If you qualify for the deduction, you will owe a smaller burden to your taxes in a given year, and you can significantly reduce the total expense of attending college.

Rules for Tax Deduction

The deduction actually comes on the front-end of your taxes. Basically, this means the sum you pay towards interest is deducted from your income in a given year. You do not receive a dollar back from the government for every dollar you spend on your student loan interest. However, if your tax rate is 25 percent, for example, you would be taxed at 25 percent of your income minus your student loan interest expense. You can only claim the deduction if you earn less than $75,000 a year or less than $145,000 for married couples filing jointly. You cannot deduct the sum if you are married filing separately or claimed as a dependent on the tax forms of another person.

Forgiven Debt Tax Obligation

When a portion of your debt is forgiven under normal circumstances, you can be held liable to pay income tax on the forgiven debt. This occurs because you actually received funding through a loan, which is a source of income. You intended to pay the funds back, which would negate the impact of this income in your situation. However, if you do not pay the sum back, then the amount counts as income again, and you can owe income taxes. This is the case with forgiven mortgage debt, forgiven auto debt and other types of debt forgiveness. With student debt, though, the portion of forgiven debt may not be counted as part of your income. Forgiveness is possible in many scenarios. With federal student debts, the loan sum may be forgiven if you serve in the military or accept a public service career after graduation. The sum can also be forgiven if you become permanently disabled. In each of these cases, you would not be obligated to pay taxes on the sum.

Filing for the Deduction

To file for a student loan interest rate deduction, you do not need to itemize the expense. Form 1040 will give you complete instructions on how to file for the income adjustment. You may use a Form 2555, Form 255EZ or Form 4563 to file your taxes. If you do this, the IRS requires that you use Publication 970 instead of the 1040 worksheet in order to determine your student loan interest income tax adjustment. This may sound complicated. However, if you are using an online filing software such as the IRS's free eFile program, the process will be automated. You only need to know how much you paid in interest in a given year in order to file the deduction effectively.


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