How Tax Deductible Are Student Loans?
Be careful at tax filing tome when taking deductions for your student loans and other school-related expenses. There are some myths going around that could cost you a lot of money, warns Bright Horizons Financial Services.
The company, which offers student loan consolidation programs, said that the deductibility of student expenses can be tricky – especially for recent grads.
For instance, you may be able to deduct up to $2,500 for interest paid on a qualified student loan, but only if your modified adjusted gross income is less than $75,000, (or $155,000 for married filing jointly status). (Now, having too much income is a problem that many recent grads would like to have, but keep these limits in mind as you advance in your career.)
One myth that makes the rounds at tax time is that you can deduct interest paid on a loan from a friend or relative. With the cost of education so high, many students borrow from family and friends once they run out of other options. But beware: you cannot deduct the interest paid on such loans from your federal taxes. Brightside Financial warns that tax breaks are only available for Federal and private (from a major lender) student loans.
However, room and board expenses are considered qualified education expenses for a tax credit. This is generally true so long as those expenses claimed are not greater than the amount determined allowable by the school attended. So, if you live off campus and your expenses are greater than what your school allows, only the amount the school allows would qualify.
Also, be careful about trying claim student loan-related deductions if your parents still claim you as a dependent on their tax return. As Bright Horizons Financial points out, no one can claim that deduction in cases where parents claim a student child as dependent, but the loan is in the student’s name and only the student is legally obligated to make payments.
It certainly gets tricky, and the best advice is to do your homework, or seek out professional tax advice. We’d like to point out that we have no professional relationship with Bright Horizons Financial Services, and as such can’t speak for or against them.
One nice thing that Bright Horizons points out is that you can undertake student loan consolidation yourself by going to www.loanconsolidationed.gov. That’s the website for the federal government’s FSA (Federal Student Aid) program.
Copyright Today’s Credit Unions