Time Limits No Longer Apply To Student Loan Deductions
A dramatic change to the Student Loan Interest Deduction has been implemented for the 2002 tax year. Previously, a taxpayer was only allowed to deduct interest paid during the first 60 months of the repayment of the loan. Starting in 2002, this is no longer the case. You can now take the deduction for every year that you make payments on the loan. If it takes you 10 years to pay off the loan, you can take a deduction each year.
What is the Student Loan Interest Deduction?
The Student Loan Interest Deduction [“SLID”] is a tax deduction that is allowed under the Internal Revenue Code for interest paid on qualified education loans. The maximum deduction each taxpayer can take on their 2002 taxes is $2,500. The deduction is taken against your gross income and will lower your adjusted gross income by up to $2,500 depending on the amount of interest you paid in 2002. This is a significant tax savings for individuals with student loans!
Restrictions
Unfortunately, there are fairly strict caps on the SLID based on adjusted gross income. Specifically, you can claim the deduction if your adjusted gross income is $65,000 or less if you are filing as a “single” person. The cap on the restrictions is raised to $130,000 if you are filing jointly.
If you fall within the income restrictions, the loan in question must also have been taken out solely to pay qualified education expenses and cannot be from a related person or qualified employer plan. Qualified education expenses include:
1. Tuition and fees.
2. Room and board.
3. Books, supplies and equipment.
4. Other necessary expenses such as transportation.
Eligibility To Claim Deduction
As long as the loan in question was used to pay the costs of attending an educational institution at which you were enrolled at least half time, you are eligible to claim the deduction. The institution that you attended must be a college, university, vocational school or secondary education institution that qualifies for such loans. The loan need not be federally guaranteed for you to claim the deduction.
What May Be Included In the Deduction?
While the SLID would seem by its name to cover only interest on your education loans, it actually encompasses far more. You can include the following items in making the deduction:
1. Loan Origination Fees.
2. Capitalized Interest.
3. Interest on Revolving Lines of Credit.
4. Interest on Refinanced Student Loans.
5. Voluntary Interest Payments.
The expansion of the Student Loan Interest Deduction is another example of recent changes in the tax code that benefit you. Many business owners financed their education by taking student loans, particularly professionals. There are literally hundreds of small changes made to the tax code each year that can save you a substantial amount of money.