The student loan interest deduction allows you to deduct up to $2,500 on interest that you paid for a student loan. If, however, your student loan is nullified, you are allowed to exclude the amount from your income.
The student loan is eligible for deduction if you took the loan solely to pay for a qualified higher education program. You can take the loan for yourself, your spouse or your kids, that is anyone who is dependent upon you for further studies.
You can claim a tax deduction on the student loan if you use the money from the loan on college or vocational school expenses such as tuition, fees, books, supplies, equipment, room and board, transportation. The other requirements to avail the benefit are: you or your dependent should be at least a half-time student in a degree, certificate, or other qualified program; and you should be legally obligated to make the repayment.
You cannot claim a tax deduction on the student loan if:• Another taxpayer claims an exemption for you as a dependent• You are married and are filing a separate return from your partner • You are not legally allowed to clear the loan• The loan was made by a relative
In addition the costs you incur have to be reduced by:• Non–taxable distributions from a Coverdell education savings account • Non-taxable distributions from a qualified tuition program • Interest from US Savings Bond that is non–taxable because it is used to pay qualified higher education expenses, • The part of scholarships and fellowships that is non-taxable • Veterans educational assistance, and • Any other non–taxable payments (other than gifts, bequests, or inheritances) received for educational expenses.
Keep in mind that if you are paying your student loans after 2002, the "first 60 months" requirement on interest paid is discontinued, and deductions are permissible for voluntary interest payments, rather than only required payments as in the previous years. Also you take the deduction on either Form 1040 or Form 1040A.
It is a great benefit, and should be availed by all families, especially those families whose children aspire for higher education but cannot find sufficient funding. A tax deduction like this can help their parents cover a part of their requirements.
