Student Loan Interest Tax Deduction

Due to the high cost of college education, many students and their parents are finding it necessary to take out student loans to help pay for those expenses, in addition to investing for education. You'll be happy to know that if you did take out a student loan and you paid interest on that loan, you may be eligible to deduct all or part of that interest. This is true whether the loan was for your education, your spouse's, your child's, or anyone else who was your dependent at the time the education was undertaken. Read on to see if you're entitled to this education tax break.

If you pay interest on a student loan, you may be eligible to take a tax deduction for the interest paid. The maximum annual amount of deductible interest is $2,500. However, the deduction is phased out for those with modified adjusted gross income between $55,000 and $70,000 for 2007 and 2008, if you are single, or between $115,000 and $145,000 for 2008, if you are married and file a joint tax return (between $110,000 and $140,000 for 2007). These amounts may be adjusted annually for inflation. It's important to note that you can 't claim this deduction if you're married filing separately, or if you can be claimed as a dependent on someone else's tax return.

There are more rules that apply to this deduction. For starters, the loan must have been taken out to pay qualified higher education expenses. In this case, qualified higher education expenses are the costs of attending a qualified educational institution, such as tuition, fees, room and board, books, equipment, and other necessary costs such as transportation. What's a qualified educational institution? For the purpose of the student loan interest deduction, it's virtually any accredited postsecondary institution, including those conducting internship or residency programs in hospitals or health care facilities. It is also required that the student whom the loan applies to was enrolled in a degree, certificate or similar program, and must have been carrying at least one-half the normal full-time load.

There's one remaining hoop we have to jump through. Assuming your education costs meet the criteria for qualified higher education expenses, they then have to be reduced by any employer-provided educational benefits received by the student, any nontaxable distributions from a Coverdell Education Savings Account, any nontaxable education savings bond interest, any nontaxable scholarships or veteran's education benefits, or any other nontaxable payments other than gifts, bequests, or inheritances.

Got all that? Obviously, this can get a bit complicated, but the benefit of the deduction is worth the trouble of walking through the necessary steps.