student loan tax deductionIf you are currently paying back student loans do you know that you may qualify for an “above the line” tax deduction on the interest that you pay? An “above the line” tax deduction means that you can take the deduction whether you itemize or not. While there are requirements that must be satisfied in order to qualify, you could more than likely be getting a tax break.

While many individuals who are paying back student loans will qualify to write off interest paid as a tax deduction, before doing so you will want to make sure that you qualify.

Here is the list of requirements that you must meet:

  • If someone can claim you as a dependent on his or her tax return, you will not qualify for the tax deduction.
  • Your adjusted gross income if single cannot exceed $75,000 and if married (filing jointly) cannot exceed $150,000 (these income thresholds may change when indexed for inflation).
  • The total amount that you can deduct cannot exceed $2,500.00 in any given year. If you pay out more than $600.00 in interest over a given year, your loan holder is required to send you Form 1098-E, which will show the total amount that you paid in interest. If you paid less than $600.00 in interest you can still qualify for the deduction but will need to calculate the interest on your own or contact your lender to find out the total amount that you paid.
  • Your loan must have been used to pay for what the IRS has determined to be a qualified expense. The IRS defines a qualified expense as money paid for tuition and any related fees, money spent for room and board, money spent to purchase required books and other supplies or equipment needed and any other necessary expenses.
  • You can only claim interest that was paid on a qualified loan. The IRS defines a qualified loan as on that is yours, your spouses or that of a dependent.
  • In order to qualify, you must have been registered at a minimum as a half-time student as defined by the academic institutions that you attended.
  • The loan you are writing off the interest for cannot have been provided by a relative or be part of a qualified employer plan. A relative is defined by the IRS as being a parent, spouse, sibling, grandparent, child or grandchild.
  • The loan you are claiming the interest on must also have been used to pay for what the IRS deems an eligible educational institution. An eligible institution is defined by the IRS as one that participates in the US Department of Education’s financial aid program. Almost all for profit and not for profit colleges, universities, and vocational schools will qualify. There are even some educational institutions located outside the United States that qualify.
  • Finally, the interest you are claiming must be from a loan that qualified educational expenses were paid for during what is deemed a reasonable period of time either before or after the loan was distributed. The time frame allowed is 90 days before the start of the given academic period the loan was approved for up to 90 days after the given academic period ends.

As long as the interest paid meets the IRS qualifications you should claim it on your tax return. For information and to ensure that you meet the IRS guidelines for qualifying, talk to your tax accountant, tax preparer or read IRS Publication 970. Generally, software programs like TurboTax will ask you the right questions to figure out if you qualify but no software program is foolproof!

The student loan deduction will remain valid for any year of repayment until 2012. Starting in 2013, unless Congress acts, the student loan tax deduction will only be valid for the first five years of repayment.