33.13 Student Loan Interest Deduction
If you paid interest on a qualified student loan in 2012, you may be able to claim an above-the-line (directly from gross income) deduction of up to $2,500. Eligibility for the deduction is phased out if you have 2012 modified adjusted gross income (MAGI, see below) between $60,000 and $75,000, or between $125,000 and $155,000 if married filing a joint return. On a joint return, the deduction limit remains $2,500 even if you and your spouse each pay interest on a qualified student loan. If you are claimed as a dependent by another taxpayer, or you are married filing separately, you may not claim the deduction regardless of your income.
You should receive a Form 1098-E (or substitute staement) from each lender that received interest payments of $600 or more from you during the year. A worksheet in the form instructions may be used to figure your student loan interest deduction. The deduction is claimed on Line 33 of Form 1040 or Line 18 of Form 1040A.
Caution: Unless Congress extends the 2012 rules, less favorable student loan interest deduction rules will apply in 2013. The deduction will be allowed only for interest payments within the first 60 months for which interest was required. In addition, the phaseout will apply to lower incomes, and voluntary payments of interest during a period of loan forbearance will not be deductible. See the e-Supplement at jklasser.com for an update.
Qualified loans and expenses.
A qualified student loan is one taken out to pay qualified higher education expenses for you, your spouse, or a person who was your dependent when you took out the loan. The education expenses must be paid or incurred within a reasonable time before or after the loan was taken out, and the funds obtained must be used toward education furnished while the student is enrolled at least half-time in a program leading to a degree or other recognized educational credential at an eligible educational institution. Eligible institutions are colleges, universities, vocational schools, and other post-secondary educational institutions eligible to participate in Department of Education student aid programs. Graduate school programs are included. Also included are medical internships or residency programs leading to a degree or certificate from an educational institution or hospital offering postgraduate training.
Qualified higher education expenses include tuition, fees, room and board (within limits (33.6)), books, equipment, and other necessary expenses such as transportation. These costs must be reduced by:
Loan origination fees and capitalized interest (unpaid interest that accrues and is added to the balance of the loan) can be counted as interest. In general, a payment, regardless of its label, is treated first as a payment of interest to the extent that accrued interest remains unpaid, second as a payment of any loan origination fees or capitalized interest, until such amounts are reduced to zero, and third as a payment of principal.
Voluntary interest payments in 2012 are deductible.
You can deduct voluntary payments in 2012 of interest made before your loan has entered repayment status or while you have a repayment deferment.
Dependents and married persons filing separately are ineligible.
You may not claim a student loan interest deduction during any year in which someone claims you as a dependent. However, you may deduct interest payments made in a later year when you are no longer claimed as a dependent.
Caution
You may not claim a student loan interest deduction for any year in which you are married and file a separate tax return.
Other restrictions.
A revolving line of credit is not a qualified loan unless you use the funds solely to pay education costs.
You may not deduct interest paid on a loan from a relative as educational loan interest (5.6).
You may not deduct interest on a loan from a qualified employer plan.
You may not claim a student loan interest deduction for any amount you may deduct under any other tax law provision, for example home mortgage interest. You also cannot use the deduction if you use part of the borrowed money for purposes other than education, for instance to make improvements to your house.
Phaseout for 2012.
The student loan interest deduction is reduced or eliminated if your modified adjusted gross income (MAGI) exceeds phaseout limits. For 2012, the reduction applies if your MAGI is more than $60,000, or more than $125,000 on a joint return. If MAGI is $75,000 or more, or $155,000 or more on a joint return, you may not claim any deduction for 2012; the deduction is completely phased out. MAGI is the same as the adjusted gross income shown on your return (disregarding student loan interest) unless you claim a deduction for tuition and fees (33.13), the exclusion for foreign earned income (Chapter 36), the domestic production activities deduction (40.23), or certain other items of foreign income or expenses were excluded or deducted from your income. Such items generally must be added back to adjusted gross income.
If your MAGI is within the phaseout range, figure the reduced deduction by multiplying your deductible interest (up to the $2,500 limit) by a fraction, the numerator of which is your MAGI minus $60,000, or $125,000 if married filing jointly, and the denominator of which is the phaseout range of $15,000, or $30,000 if married filing jointly.
The student loan deduction worksheet in the Form 1040 or Form 1040A instructions can be used to figure the phaseout reduction and the amount of your deduction.
