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Student Loan Interest Deduction
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Article on Student Loan Interest Deduction
Certain borrowers qualify for Student Loan Interest Deduction to a maximum of $2500 a year depending on income. This amounts to a tax deduction for the interest already paid on student loans and applies to all loans used to pay for school expenses at a post-secondary level.
Criteria for Eligibility
Student loan interest deductions can be made for loans issued to the student themselves, for their spouse (if filing jointly) and for dependents. If a loan is cancelled then the borrower may not have to include any amount in income on their tax return. As the deduction is regarded as an adjustment to income, it does not need itemising in deductions on the borrower’s tax return. To qualify for a Student Loan Interest Deduction, the borrower must have a gross annual income of less than $70,000, or $145,000 if filing jointly with their partner. Those earning higher amounts than this do not qualify for a student loan interest deduction, and the amount deductible is gradual along with annual gross income each year. Bear in mind as well that, if filing jointly, partners cannot also be claimed as dependents.
Who cannot Apply
Only the borrower themselves can claim for interest paid even if someone, a relative for example, actually paid it. Amounts not claimed in one year can be carried over for the next five years and still be reclaimed. Student loan interest deduction can only be claimed on loans that the student is legally obligated to repay. For example the parents of a borrower who are repaying the loan on their behalf may apply for the student loan interest deduction but would be ineligible as they are not legally required to repay that loan as the borrower themselves is. The graduate would be entitled to apply but the parents are not. The borrower should apply even if they are not the person currently paying back the loan.
Eligible Loans
Personal loans or lines of credit are not eligible for a student loan interest deduction. Student loans combined with other kinds of loans are also ineligible, such as student loans consolidated alongside private loans. Student loans received from another country are also ineligible for Student Loan Interest Deduction. If the borrower failed to pay back a student loan, i.e. defaulted on the loan, then they are also ineligible to claim back any interest on that loan. The student loan must have been used solely for educational expenses such as tuition, books, supplies, transportation, and accommodation, although expense receipts are unlikely to be requested. The student loan service provider should send the borrower a 1098-E form and the amount of interest paid on student loans each year unless the interest was below a certain amount (usually $600). If they do not send the form the borrower should contact them.
If the borrower applies for a student loan interest deduction they can put the tax return back into paying off the loan, thereby paying it back quicker and saving more money long-term.
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