19.   Education- Related Adjustments

Introduction

This chapter discusses the education-related adjustment you can deduct in figuring your adjusted gross income.

This chapter covers the student loan interest deduction, tuition and fees deduction, and the deduction for educator expenses.

Useful Items - You may want to see:

Publication

  • 970 Tax Benefits for Education

What's New for 2014

Student loan interest deduction.   For 2014, the student loan interest limit amount has increase from $75,000 to $80,000 ($155,000 to $160,000 if filing a joint return).

Tuition and fees deduction.   The tuition and fees deduction has expired and you can no longer take this deduction. See caution below for more information.

The deduction for educator expenses.   The deduction for educator expenses has expired and you can no longer take this deduction. See caution below for more information.

At the time this publication was prepared for printing, Congress was considering legislation on expired provisions. To see if the legislation was enacted, go to www.irs.gov/formspubs.

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2014. Table 19-1 summarizes the features of the student loan interest deduction.

Table 19-1. Student Loan Interest Deduction at a Glance Do not rely on this table alone. Refer to the text for more details.

Feature Description
Maximum benefit You can reduce your income subject to tax by up to $2,500.
Loan qualifications Your student loan:
• 
must have been taken out solely to pay qualified education expenses, and
  cannot be from a related person or made under a qualified employer plan.
Student qualifications The student must be:
you, your spouse, or your dependent; and
  enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.
Time limit on deduction You can deduct interest paid during the remaining period of your student loan.
Phaseout The amount of your deduction depends on your income level.

Student Loan Interest Defined

Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

Qualified Student Loan

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

  • For you, your spouse, or a person who was your dependent (defined in chapter 3) when you took out the loan;

  • Paid or incurred within a reasonable period of time before or after you took out the loan; and

  • For education provided during an academic period when the student is an eligible student.

Loans from the following sources are not qualified student loans.

  • A related person.

  • A qualified employer plan.

Exceptions.   For purposes of the student loan interest deduction, the following are exceptions to the general rules for dependents.
  • An individual can be your dependent even if you are the dependent of another taxpayer.

  • An individual can be your dependent even if the individual files a joint return with a spouse.

  • An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,950 for 2014).

  

Reasonable period of time.   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.

  Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met.
  • The expenses relate to a specific academic period.

  • The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period.

  If neither of the above situations applies, the reasonable period of time is determined based on all the relevant facts and circumstances.

Academic period.   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

Eligible student.   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

Enrolled at least half-time.   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.

  The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.

Related person.   You cannot deduct interest on a loan you get from a related person. Related persons include:
  • Your spouse;

  • Your brothers and sisters;

  • Your half brothers and half sisters;

  • Your ancestors (parents, grandparents, etc.);

  • Your lineal descendants (children, grandchildren, etc.); and

  • Certain corporations, partnerships, trusts, and exempt organizations.

Qualified employer plan.   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan.

Qualified Education Expenses

For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items.

  • Tuition and fees.

  • Room and board.

  • Books, supplies, and equipment.

  • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than:

  • The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student; or

  • If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Eligible educational institution.   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

  Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

  For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.

  An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility.

  
The educational institution should be able to tell you if it is an eligible educational institution.

Adjustments to qualified education expenses.   You must reduce your qualified education expenses by certain tax-free items (such as the tax-free part of scholarships and fellowship grants). See chapter 4 of Publication 970 for details.

Include as Interest

In addition to simple interest on the loan, certain loan origination fees, capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans can be student loan interest if all other requirements are met.

Loan origination fee.   In general, this is a one-time fee charged by the lender when a loan is made. To be deductible as interest, the fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the life of the loan.

Capitalized interest.    This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan.

Interest on revolving lines of credit.   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses , earlier.

Interest on refinanced student loans.   This includes interest on both:
  • Consolidated loans—loans used to refinance more than one student loan of the same borrower, and

  • Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan.

If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan.

Voluntary interest payments.   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status.

Do Not Include as Interest

You cannot claim a student loan interest deduction for any of the following items.

  • Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments.

  • Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs.

  • Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. For more information, see Student Loan Repayment Assistance in chapter 5 of Publication 970.

Can You Claim the Deduction

Generally, you can claim the deduction if all of the following requirements are met.

  • Your filing status is any filing status except married filing separately.

  • No one else is claiming an exemption for you on his or her tax return.

  • You are legally obligated to pay interest on a qualified student loan.

  • You paid interest on a qualified student loan.

Interest paid by others.   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. See chapter 4 of Publication 970 for more information.

No Double Benefit Allowed

You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest).

How Much Can You Deduct

Your student loan interest deduction for 2014 is generally the smaller of:

  • $2,500, or

  • The interest you paid in 2014.

However, the amount determined above is phased out (gradually reduced) if your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). For details on figuring your MAGI, see chapter 4 of Publication 970.

How Do You Figure the Deduction

Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1 in chapter 4 of Publication 970.

To help you figure your student loan interest deduction, you should receive Form 1098-E, Student Loan Interest Statement. Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2014 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2015.

For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. For information on allocating payments between interest and principal, see chapter 4 of Publication 970.

To claim the deduction, enter the allowable amount on Form 1040, line 33, or Form 1040A, line 18.


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