Can I Deduct Student Loan Payments?
Many students leave college or graduate school with a hefty amount of student loan debt. As you make your student loan payments, you may be able to deduct part of the payments from your taxable income. As of the 2010 tax year, you can deduct up to $2,500 of interest paid on your student loans.
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Qualifying Student Loans
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Not all loans qualify as "student loans." You must have taken out the loan for yourself, your spouse or your dependent, and used the loan for qualified educational expenses. Qualifying expenses are limited to tuition, fees and supplies, unless the student is enrolled at least half-time, in which case qualified expenses also include room and board.
Qualifying Payment Portion
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When repaying your student loans, you may only deduct the interest paid from your income taxes. You cannot deduct the portion of your payment that goes toward paying down the principal of your student loans. This amount will vary over time, because as you pay off more of your loan, more of your payments will go toward principal. At the end of the year, your student loan lender mails you a Form 1098-E, which shows how much you paid in interest in box 1.
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Other Requirements
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The Internal Revenue Service restricts who can deduct the interest portion of student loan payments, based on your modified adjusted gross income. As of the 2010 tax year, if your MAGI exceeds $75,000 if you are single, or $150,000 if you are married filing jointly, you cannot claim any student loan interest as a deduction. If you are single and your MAGI falls between $60,000 and $75,000 or if you are married filing jointly and your MAGI falls between $120,000 and $150,000, your maximum deduction for student loan interest decreases. The higher your income within this range, the lower your maximum deduction. However, if your filing status is married filing separately, the IRS prohibits you from claiming the deduction, regardless of your income.
Claiming the Student Loan Interest Deduction
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To claim a deduction for the interest portion of your student loan payments, you must use either Form 1040 or Form 1040A to file your tax return. You can claim the deduction without itemizing, however, because the write-off counts as an adjustment to income. If your modified adjusted gross income falls in the reduced deduction range, use the Student Loan Interest Deduction Worksheet, found in both the Form 1040 and Form 1040A instructions, to figure the amount you can deduct.
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