This is the third part of our multi-part series of blogs on tax benefits for education. Any present or former student should utilize the knowledge, experience and expertise of the tax professionals at the Thorgood Law Firm to ensure that they take advantage of all the credits and deductions that the law allows for students of higher education.
Tax credits, deductions and savings plans offer taxpayers ways to reduce their expenses for higher education.
- A tax credit may reduce the amount of potential income tax.
- A deduction reduces the amount of income that is subject to tax, thus reducing the amount of tax paid.
- Certain qualifying savings plans may either allow accumulated earnings to grow tax-free until money is distributed, allow the distribution itself to be tax-free, or both.
- An exclusion from income eliminates income tax on a particular benefit, while eliminating the possibility that such benefit may qualify as a credit or deduction.
Student Loan Interest Deduction
Student loan interest is interest paid annually on a qualified student loan, including both required and voluntary interest payments. A special deduction is allowed for interest paid on a student or education loan used for higher education. This deduction may reduce the amount of income subject to tax by up to $2,500. The student loan interest deduction is taken as an adjustment to income and may be claimed even if the taxpayer does not itemize deductions.
Qualified Student Loan
The student loan interest deduction applies to loans taken solely to pay qualified education expenses that are:
- For a taxpayer, his or her spouse, or a person who was a dependent when the loan was taken;
- Paid or incurred within a reasonable period of time before or after the loan was taken;
- For education provided during an academic period for an eligible student.
Loans from the following sources are not qualified student loans:
- A person related to the taxpayer;
- A qualified employer plan.
Qualified Education Expenses
For purposes of the student loan interest deduction, qualified education expenses are defined as the total costs of attending an eligible educational institution. They include amounts paid for:
- Tuition and fees.
- Room and board.
- Books, supplies and equipment.
- Other necessary expenses.
The cost of room and board qualifies only to the extent that it is not more than the greater of:
- The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance for a particular academic period and living arrangement of the student, or
- The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
If you or a relative are currently enrolled in college and have questions about education credits and deductions, or are repaying a student loan and have questions about student loan interest deductions, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
