Writing Off Student Loan Debt
The tax write-off for student loan debt is limited to the interest paid and cannot include the principal repaid. However, the deduction includes loans taken out not only for your own education, but also for loans taken out for anyone who, at the time the loan is taken out, qualifies as your dependent.
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What's Deductible?
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Only the interest portion of payments made on your student loans can be deducted from your income taxes. The interest can be either voluntary payments or mandatory. For example, if you are currently in school and have an unsubsidized loan, you have the option to make interest-only payments on the loan. These payments can be included in your deduction. Also, if you are liable for the loan, you can deduct the interest even if your parents pay because the IRS considers the payment to be a gift to the child first and then the child using the money to pay the loan. At the end of the year, your lender sends you a Form 1098-E to show how much interest you paid.
Who Cannot Take Deduction
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You cannot claim the student loan interest deduction if you can be claimed by someone else as a dependent for income tax purposes. Also, if your filing status is married filing separately, you cannot claim the deduction. Finally, if your modified adjusted gross income exceeds the annual limits, the IRS prohibits you from writing off student loan interest. As of 2011, you cannot write off student loan interest if your modified adjusted gross income exceeds $150,000 for joint filers or $75,000 for singles.
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Claiming Student Loan Interest Deduction
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If you are eligible to claim the student loan interest deduction, file your taxes with Form 1040 or Form 1040A, not Form 1040EZ. If you use Form 1040, report the interest on line 33. If you use Form 1040A, you report the deduction on line 18 instead. The deduction reduces your annual taxable income. When you file your income tax return, attach your Form 1098-E to document the amount of interest you paid.
Student Loan Interest Deduction Savings
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The amount the student loan deduction saves you on your income tax equals your tax rate times your deduction amount. The greater your tax rate and the more interest you pay, the larger your income tax savings. For example, if you pay $1,000 in student loan interest, you would save $350 if you fall in the 35 percent income tax bracket but only $230 if you fall in the 23 percent tax bracket. Since the student loan interest deduction is an adjustment to income, you do not have to take into consideration losing your standard deduction.
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